Townsquare Media: Small-Cap Value Stock With 40% Upside

Summary

• Townsquare Media is a radio broadcasting and digital media company trading at a steep discount to intrinsic value due to the underperforming Entertainment segment.
• The low-margin Entertainment segment is masking the true value of Townsquare’s outperforming core radio business that is conservatively worth over $11/share.
• In Q3-2017, management announced a turnaround plan for the Entertainment segment. We anticipate successful execution that will drive up EBITDA multiples to peer levels and uncover true value of the radio business.
• High-margin company with strong cash flow generation, good management and solid balance sheet, trading at 17% free cash flow yield.
• Excellent opportunity to buy a strong business at a bottom price, with attractive risk/reward profile.

Business description

Townsquare Media (NYSE:TSQ) is a media, entertainment and digital marketing solutions company focused on small and mid-sized markets across the United States. The company operates 317 radio stations and 325 websites in 67 US markets. It also serves over 12,000 small to medium-sized business through its digital marketing operations, operates 550 live events with nearly 18 million annual attendees, and reaches over 50 million monthly visitors through its music-focused digital advertising network. The company reports two segments in its public filings: Local Marketing Solutions and Entertainment.

Local Marketing Solutions (LMS) houses the company’s core radio operations, where TSQ generates revenue from selling airtime to local advertisers. Townsquare’s radio stations capture the number one share of radio ad revenue in two-thirds of its markets, and the number two spot in the rest. The company’s focus on local advertising has helped to insulate it from both competition and economic downturn. Because TSQ targets local businesses and not national advertisers, it seldom competes directly with larger advertising media like television stations, magazines, or newspapers with a national reach.

Furthermore, the markets in which TSQ operates have historically exhibited below-average volatility in radio advertising spending, which has resulted in modest but consistent top line growth for years. Also included in the LMS segment is TSQ’s digital marketing solutions business, which adds to the suite of advertising services offered by the company and deepens its customer relationships.

The Entertainment segment consists of a diverse range of live events operated by TSQ, such as music festivals, trade shows, and other experiential events like the Insane Inflatable 5K running event. A flurry of acquisitions has resulted in this segment growing from just 15% of total revenues in 2014 to 34% in 2016.

Most recently, TSQ in 2015 acquired North American Midway Entertainment (NAME), the largest mobile amusement operator

Analyst’s 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.