Salem Media Group Is A Good Buy For 2017

| About: Salem Media (SALM)

Summary

Salem Media Group progress report points to a bright future ahead with forward-looking acquisitions that will propel it forward in the next year.

The broadcasting behemoth will need to invest in its digital division, particularly online streaming and live video broadcast to establish its dominance among millennials.

With its tentacles already stretched across 38 major US markets, the sky is the limit for SALM.

Investment Thesis

After a steady climb over the years, it can only get better for Salem Media Group (NASDAQ: SALM). Several austerity measures such as a pause on further acquisitions and partial self-insurance for employees indicate a company headed towards higher revenues and consequently higher dividends.

Salem Media Group is a California-based company specializing in radio broadcast, Internet service provision and book and magazine publishing. Its content is geared towards Christian audiences and listeners interested in family-themed content and conservative values. Formerly known as Salem Communications, the company was founded by Ed Atsinger and Stu Epperson. Initially based in North Carolina and California, the founders expanded SALM by buying more stations in Boston, New York, San Antonio, San Francisco, Portland and Los Angeles. SALM, unlike other Christian broadcasters, is a for-profit corporation made of several constituent units, including:

  • Salem Radio Network: This radio network distributes talk, music and news programs to more than 2,700 affiliates.
  • Salem Radio Representatives: This national sales force is charged with marketing and advertising.
  • Salem Web Network: This is SALM's Internet content provider, which streams Christian content to over 100 affiliates and conservative websites.
  • Salem Publishing: This unit is SALM's publisher of Christian-themed books and publications.

SALM has made several acquisitions over the years including:

  • 2006: Xulon press-a digital publisher of Christian books
  • 2009: HotAir-a conservative blog for political news and commentary
  • 2014: Eagle Publishing, home to RedState, Human Events and Regnery
  • 2013: Twitchy, a conservative Twitter-curation site DividendInvestor.com, an investment software tool with analysis of stocks and dividends to supplement SALM'S portfolio of trading products
  • 2015: Two radio stations from Radio Disney
  • 2016: Hillcrest Media, an editing, design, printing and distribution company.

Media Industry Trends

The media industry is in a constant state of change with unpredictable shifts in technology and ways of disseminating information. The last decade has seen an enormous disruption from the traditional radio, newspapers and magazines, with people preferring personalized content and on-the-go apps. Now you can access news and information about anything anywhere in the world with just a swipe of the keyboard. Forecasters have given an outlook on the media trends that are likely to dominate 2017 and subsequent years. The onus is on media players to revolutionize their business models and content creation techniques and be on the look-out for any slight change in consumption of content.

Audiences are fragmented, with each group having its own unique type of content and mode of consumption. In this digital age, the millennnials have emerged as the largest group that will go on to consume most on the online content. In fact, most millennials depend only on online-streaming channels for entertainment, information and communication. A forward-thinking broadcaster will adopt a central approach to millennials to open up growth opportunities.

Valuation

SALM's market capitalization stands at $165.27 million, with the share price of $6.40. The company has a PE ratio of 14.9, compared to the industry and S&P ratios of 45.1 and 20.3, respectively. Its 5-year average is 25.1. The Price/Book is at 0.8 compared to the industry average of 3.2. The 3-year revenue growth is at 5.1 up from -3.3. Net income growth has also moved from -75.0 to 36.1. The ROA TTM and ROE TTM is at 1.9 against an industry average of 0.4, and 5.3 against an industry average of 1.2 respectively. SALM has a dividend yield of 4.06%. The company has been paying dividends consistently since 2006.

Understandably, the corporation underwent some turbulent times in the last two quarters of 2016. In August, the CEO indicated that a weak economy had impacted on their projected revenues in the second quarter. Being a conservative broadcaster, SALM had a projected huge income from Donald Trump's campaign. Despite being a political year, however, advertising revenue fell short of expectations, with political revenue adding up to $500,000. In comparison, the second quarter of 2008 campaigns added some $700,000 to SALM'S balance sheet. However, this revenue is expected to rise in a non-political year. The company also reported a decline in the losses associated with acquisitions made in previous years. However, the CEO stated that recovery is going to be quick with a larger number of advertising clients. Furthermore, going forward, the company will reduce the number of acquisitions.

Secondly, the company made some policy changes to reduce expenses. One of this was for employees to partially self-insure themselves to lessen the burden the company bore on health insurance claims. The company had initially projected a 10% increase in healthcare claims in Q3, but instead the claims rose by 52%.

The income generated from website traffic to SALM websites grew almost twofold from $145 million in Q1 of 2015 to $250 million in Q1 0f 2016. 32% of this traffic was from desktop clients while 68% was from tablets and mobile users.

Conclusion

While I am bullish on the company, it faces some challenges. First, the company faces competition from new companies that stream online channels such as Spotify, Netflix (NASDAQ:NFLX) and Apple (NASDAQ: AAPL) music.

In the most recent quarter, the company announced a debt of $270 million against a total cash amount of $80,000. It has a debt to equity ratio of 1.262, which is its all-time low. I believe based on the company's operating cash flow of $37.21 million, it can manage to stay afloat.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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