Entravision: Mis-Valued Assets And A Burgeoning Market Make This One Hard To Ignore

Summary

• Entravision shares are down around 35% since late January.
• FCC's incentive broadband spectrum auction has illustrated the mis-valuation of the company's assets.
• Strong tailwinds from mid-term elections and a growing Spanish-language population will help increase revenues and earnings in 2018.
• With a dividend yield over 4%, EVC is an attractive value play.

Entravision Communication Corporation (NYSE: NYSE:EVC) is a leading diversified global media company that targets a rapidly growing Hispanic population in the U.S. and around the world. Shares of EVC have gone on quite the ride since the beginning of 2018 and are now down around 35% since late January highs of around $7.30/share. With a current dividend yield over 4%, the company is beginning to look increasingly attractive as a deep value play.

EVC data by YCharts

EVC’s higher than average leverage along with inconsistent revenues and earnings have kept investors away for years. Total indebtedness was approximately $299.3 million as of December 31, 2017 and for a company with a market cap hovering around $400 million, this is quite substantial. However, on March 29, 2016, the FCC announced the first ever broadcast incentive auction to “realign the use of public airwaves,” which allowed companies like EVC to sell the rights to their broadcast spectrum so they can be repurposed for 5G wireless services.

EVC permanently sold the spectrum rights to four of its television stations, and was able to net $263.9 million during the process. With current assets on the books at discounted values due to impairment charges that date back to 2006-2008, it has long been assumed that the actual asset value of the company’s broadcast spectrum in particular has been mis-valued. The $263.9 million gained through the sale of only 4 of 55 stations illustrates the true net asset value of the company to be substantially higher than is recorded.

In a market stricken with volatility fever, I am not the type of investor who continually recommends buying the dip, but in every market, whether that be bear, bull or stagnant there are always value plays and I see EVC as one of them. Given that EVC does not expect the broadcast spectrum transaction will result in a “material change in operations or results of the company,” I believe they will be buoyed by the recent sales in 2018. The company now has the funds to pay down debts and continue with similar acquisitions to that of 2017 designed to grow revenues in the company’s digital media segment.

With a share buyback program in place, a dividend that rose from $0.13/share in 2016 to $0.16/share in 2017, congressional elections in 2018, which will add increased advertising revenues, and a rapidly growing Spanish-language audience, the future is bright at Entravision. All of this is why I picked up shares as of market open on the 3^rd of April 2018 and I am recommending the stock as a BUY.

Source: Entravision

The Business

EVC’s business operates under three main segments, television broadcasting, radio broadcasting and digital media. The company’s 55 television stations are located in large Hispanic markets around the U.S. with stations based in California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Nevada, New Mexico, Texas and Washington, D.C. Entravision also operates 49 radio stations (38 FM, 11 AM) across the country and provides digital media advertising solutions and analytics abroad in Latin America, Argentina, and Spain.

In 2017, 77% of the company’s revenues came from television advertising, while 12% and 11% came from radio and digital media advertising respectively. Entravision’s main partner is the leading American Spanish-language broadcast network Univision. All of Entravision television stations are Univision or UniMás affiliated and Univision Communications owns 10% of Entravision common stock. EVC owns or operates Univision-affiliated television stations in 24 markets, including 19 of the top 50 Hispanic markets in the United States.

Univision’s primary network is the most watched Spanish-language channel in the U.S. and is available in around 90% of U.S. Spanish-speaking households. Also, Univision’s primary network, together with UniMás, holds more than double the television prime time audience share of its leading competitor, the Telemundo network, among Hispanic persons 2+ years of age as of May 2017. EVC has aligned itself with a winning partner in a growing market and they extended the relationship in 2017, with a new agreement that pushes into 2023.

A Brief Financial Overview

Although many television and radio broadcasting companies have struggled mightily as their businesses are challenged by online platforms like Netflix (NFLX), Entravision has been able to maintain its revenues despite the headwinds in the industry. Their significant debt, and a leverage ratio of around 4 has been a real deterrent for many investors, but I would remind them that this is a company with a healthy debt/equity ratio of .84 (in reality, it's far lower than that, but we will get to this later).

Falling EBITDA figures are a concern for the company, but 2017 was expected to be a down year for EVC as the company is dependent on political ad revenues. With heated 2018 mid-term congressional elections coming up, undoubtedly both revenues and EBITDA will be higher in 2018. The enormous $264 million windfall from sales during the FCC’s incentive broadcast auction will also help enable EVC to increase its revenues with continued acquisitions and lessen its debt burden as it has done since 2013 when total debt was over $364 million.

It’s also important to note that although Cash and Cash equivalents are down, these figures also do not include the restricted cash that came from the FCC auction, with that included the company is in a cash position over $300 million.

In $ MM	2017	2016	2015
Net Revenue (does not include proceeds from FCC auction)	272,091	258,514	243,484
Consolidated EBITDA	51,400	69,243	76,324
Net Income	176,293	20,405	25,625
Total Debt	299,300	290,447	313,337
Cash and Cash Equivalents	39,560	61,520	47,924

Click to enlarge

Table Compiled by Author From 2017 10-K

The FCC Auction Illustrative of Mis-valued Assets For Entravision

Excuse the long quote, but perhaps it’s best to allow the FCC to properly define the auction and then we can get to the effects on Entravision’s business.

On March 29, 2016, the FCC commenced the first-ever “incentive auction” designed to repurpose spectrum for new uses. Authorized by Congress in 2012, the auction used market forces to align the use of broadcast airwaves with 21st century consumer demands for video and broadband services. The auction preserves a robust broadcast TV industry while enabling stations to generate additional revenues that they can invest into programming and services to the communities they serve. And by making valuable “low-band” airwaves available for wireless broadband, the incentive auction will benefit consumers by easing congestion on wireless networks, laying the groundwork for “fifth generation” (5G) wireless services and applications, and spurring job creation and economic growth.

Basically, there were two parts to this auction process, a “reverse auction” whereby broadcasters could sell the rights to their broadcasting spectrum and a “forward auction” where mobile broadband providers could bid on the assets. This auction system repurposed an incredible 84 megahertz of spectrum and yielded $19.8 billion in revenue, including $10.05 billion for winning broadcast bidders and more than $7 billion to be deposited in the U.S. Treasury.

For Entravision, the FCC’s auction led to $263.9 million in one-time revenues and $301.5 million in cash from operating activities at the end of 2017, the most ever for the company. This, at the cost of permanent spectrum usage rights for four stations; WMDO-CD serving the Washington, D.C. market, WJAL-TV serving the Hagerstown, Maryland market, KSMS-TV serving the Monterey-Salinas, California market, and WUVN-TV serving the Hartford, Connecticut market.

It is undeniable the sale of these rights will impact the asset value of the four stations affected, although this is not a normal sale. In fact, it seems like it was simply a great deal for EVC given the channel sharing agreements which go into place post ‘sale’.

From 2017 10-K:

Under a channel sharing arrangement, a station that has returned spectrum (known as a sharee) enters into an agreement, meeting certain requirements set by the FCC, with another station that has not returned spectrum (known as the sharer), and the two parties then divide the authorized spectrum of the sharer enabling both to continue to transmit programming but with smaller amounts of bandwidth.

EVC is required to share bandwidth at these four stations, but they still are able to run their programming using the assets and also pocketed a cool $264 million from the deal, not bad. All of this is great, but what the sale really illustrates is just how mis-valued Entravision’s assets really are. EVC’s broadcasting assets are being carried at values far below fair market value due to improvements in broadcasting technology, a more favorable marketing environment and most importantly due to 2006-2008 impairment charges that remain on the books.

For laymen (like myself) what has happened is this, in 2006-2008, EVC had assets on their books at purchase value, but these assets in reality were worth far less than what they paid and thus they used impairment charges to discount the assets on their books so they could reflect real values. At the time, this was warranted. Now these assets remain valued at their 2006-2008 levels due to accounting rules which stipulate impairment charges may only be changed if/when the assets are further impaired or offered for sale.

This has not happened in the past decade for the majority of the company’s assets meaning they remain on the balance sheet at values far below what they are really worth. This is not uncommon to see in the markets, but what is uncommon is to have evidence that these assets are really far more valuable than is accounted for.

This evidence is what investors got when EVC sold the spectrum rights to only 4 stations for the staggering $264 million figure. They were able to sell at these exorbitant prices because of the bandwidth requirements of 5G, which can only be met by using broadband spectrum like that used by television broadcasters. If you’re like me and sometimes the latest in tech eludes you, check out CNBC’s YouTube video explaining “What is 5G?” Or maybe this graph from the video is enough to clarify things.

Source: CNBC video

The company’s remaining broadcasting assets now have a basis of comparison and it’s quite clear to see they are far more valuable than what is on the balance sheet. According to the 2017 10-K, EVC has Total Assets of $766 million including all segments. Given that just 4 of the company’s 55 television broadcasting spectrums just sold for $264 million, this number is clearly quite low. Don’t take my word for it though, EVC carried out its own review of its television segment's indefinite life intangible assets by using an “income approach” in their 2017 10-K and found:

The fair values exceeded the carrying values in amounts ranging from 62% to over 1,000%.

Since the underlying business of EVC has not “materially changed” according to the company I would imagine if the market finds out a company’s assets are actually worth between 1.6x to 100x greater than what is on the books that this should be good for share prices. EVC also now trades at a lower EV/EBITDA due to lowering market value and increasing cash from the proceeds of the sale of its broadband spectrum.

Enterprise Value = ((Market Value + Obligation)-(Cash+Proceeds)

EV = (409,520,000+299,300,000)-(39,560,000+263,900,000)

EV = 405,360,000 EBITDA*= 51,400,000

EV/EBITDA = 7.88

_{* Consolidated Adjusted EBITDA is used here. As consolidated adjusted EBITDA excludes non-cash gain (loss) on sale of assets, non-cash depreciation and amortization, non-cash impairment charge, non-cash stock-based compensation expense, net interest expense, other income (loss), gain (loss) on debt extinguishment, income tax (expense) benefit, equity in net income (loss) of nonconsolidated affiliate, non-cash losses, syndication programming amortization less syndication programming payments, revenue from FCC spectrum incentive auction less related expenses, expenses associated with investments, acquisitions and dispositions and certain pro-forma cost savings, consolidated adjusted EBITDA has certain limitations because it excludes and includes several important financial line items.}

A Growing Audience And EVC’s Moves To Reach It

The positives don’t end with mis-valued assets at EVC, the growing Spanish-language audience in the U.S. is another huge part of the story for the company. Although both television and radio broadcasting are in a period of decline, and the business is much maligned by the markets, EVC has found a slight break in the headwinds with its Hispanic audience that is growing at eight times the rate of the non-Hispanic population and is expected to reach over 70 million people, or approximately 21% of the total U.S. population, by 2022.

There are more than 57 million Hispanics currently living in the United States and their spending power continues to increase. In 2017, the Hispanic population accounted for total consumer expenditures of over $815 billion. Hispanic households are also younger and larger than non-Hispanic ones, averaging 3.4 persons and 30.8 years of age vs. 2.4 persons and 43.8 years of age.

This younger, more attractive advertising profile, means not only growth in population, but also in spending and political power. Advertisers have taken note. In 2016, over $9.5 billion of total advertising expenditures in the United States were placed with Spanish-language media, 88% of which was placed with Spanish-language television, radio and digital advertising.

Source: The Nielsen Company

With this growing customer base and changing consumer media habits, EVC has to make changes to continue revenue growth and be able to meet demand. One move they made of late was the acquisition of digital media company, Headway, a provider of mobile, programmatic, data and performance digital marketing solutions in the United States, Mexico and Latin America. According to the CEO Walter Ulloa in the Q4 conference call:

Headway is a pioneer and leader in digital advertising with rapid growth of strong advertiser base, proprietary data assets, offering unique performance targeting technology and data systems to top advertisers and agencies. We are pleased with the progress this business has made since closing and remain excited about the future prospects of our digital platform bolstered by this addition.

This acquisition pushed net revenue for the digital media segment to $57.1 million in 2017, from $23.1 million in 2016. The segment now accounts for 11% of the business and continues to grow. EVC seems to understand it needs to focus efforts on new media opportunities going forward, but still is reluctant to give up on its radio business.

Even when pushed by John Kornreich of JK Media in the Q4 conference call, CEO Walter Ulloa stood by his radio business, saying it will be profitable in 2018. The recent announcement that World Cup 2018 will be aired on EVC’s radio networks is a great example of this commitment to the legacy business.

Helpful Tax Cuts, Share Buy-Backs And A Dividend Increase

When I look at buying a company I see as undervalued, I often want to see evidence that management feels the same way, because no one knows the business better. There has been clear evidence in the 2017 10-K that management is aware of its mis-valued assets, but also actions like a dividend increase and a share buyback program help to illustrate that insiders share my belief that the company is a value play. In September 2017, EVC increased their dividend payout by 60% to $.05/share in Q4 after receiving the proceeds from the FCC auction.

This meant that on the year, the dividend was up from $.13/share to $.16/share, but in 2018, it will be even higher. EVC then instituted a $15 million dollar share buy-back program shortly after which will boost EPS in 2018. Entravision will also be aided in 2018 by a reduction in its effective tax rate. The company has historically faced a significant tax burden of almost 39%, but in 2017 that number fell to 31% and this rate is expected to continue in 2018.

Conclusion

With persistent fears of a developing trade war between China and the U.S., the markets are turbulent to say the least. It seems almost normal these days to see 1% or greater swings in the DOW. This increased volatility means investors need to be more careful than ever when attempting to weed out value plays from the masses. Mr. Market is known to run with ruthless efficiency, thus making it rare to find a company that is truly mis-valued.

I believe I have found one of these mis-valued rarities in Entravision. The current Price to Book ratio of 1.19 is already cheap, but when you consider 77% of EVC’s assets (the television broadcasting assets) are mis-valued by anywhere from 60% to 1000%, it becomes clear that this is a company trading at a historically low Price to Book value. You could argue that the asset value doesn't matter if EVC can’t make profits from those assets, but there has been no evidence that this is a company unable to earn a profit.

Even in the worst of circumstances, if EVC had to sell the company, they would be able to get far more than current market value through the sale of their television broadcasting assets alone. With the race to 5G really just beginning to hit its stride, EVC has accidentally landed on a gold mine of broadcasting spectrum assets that are now rapidly appreciating in value. Although this may be an unlikely outcome, I don’t think it's unreasonable to assume a company like Verizon (NYSE:VZ) that is striving to catch up with AT&T (NYSE:T) in the race to 5G may take a look at EVC as a potential acquisition.

For now, EVC looks to have a year full of possibility ahead of it. With mis-valued assets, a $264 million windfall, a share buy-back program, an increasing dividend, congressional elections in 2018, which will add increased advertising revenues, and a rapidly growing Spanish-language audience, I see EVC as a clear BUY and expect an impressive year of growth in 2018.

Analyst’s Disclosure: I am/we are long EVC. 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.