Entercom: Another Underappreciated Radio Company

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About: Entercom Communications Corp. (ETM)
by: WY Capital
Summary

Entercom is the last top 3 radio company that hasn't filed for bankruptcy.

Its financials have improved significantly since it acquired CBS radio a few years ago.

Growth is likely to be high with many great growth opportunities to exploit.

Valuation is quite reasonable, and insiders are buying.

While investors are bidding tech stocks into the stratosphere, Entercom Communications (ETM) is one of the few stocks that have received little attention and lingered in the dust. However, ETM still has a lot of things going for it, like improving financials, a reasonable valuation, and significant insider buying. We are optimistic that the market should soon realize what a bargain ETM is and bid it up accordingly, but even if ETM continues to linger in the dust, investors can collect a 5.9% yield while waiting.

Last one standing

ETM is one of the largest radio companies in the US. According to its 2018 10K, ETM reaches over 190mil people and over 90% of people 12+ in the US. It makes money by selling advertising time to local, regional, and national advertisers.

While peers Cumulus (CMLS) and iHeartRadio (IHTM) have filed for bankruptcy, ETM is the only top 3 radio company that has survived the turmoil that has plagued the radio industry for the past few years. Despite a large merger with CBS Radio 3 years ago, leaving it saddled with debt, ETM has survived. However, its stock price hasn't done well, having dropped over 50% since the merger, possibly due to investor fears surrounding the industry.

Improving financials

Today, a few years after the CBS merger, ETM results have improved significantly. Just as promised in the investor presentation regarding the merger, ETM has improved the results of the underperforming CBS radio stations and grew revenue and operating income YOY.

Source: Investor presentation

Source: 10Q

Synergies, along with revenue growth, helped drive the increase in adjusted operating income (ignoring one-time charges) from below $20mil to nearly $30mil YOY. ETM expects to harvest more synergies in the future, which bodes well for future profits.

We continue to expect to realize in P&L during 2019 $45 million or more of incremental net cost synergies plus for the full year after factoring in 2 points of normal cost escalation, we expect our total cash expenses will be down year-over-year by around 2% and we now expect our savings to be more ratably throughout the remainder of this year.

Q1 earnings call

Strong revenue growth drivers

Like we noted with CMLS, ETM has its own thriving podcasting business and has acquired 45% of Cadence13, one of the largest podcasting companies in the world, with an option to acquire the balance, and in total, they get over 101mil downloads monthly, more than twice of that of CMLS's business. With digital audio advertising growing in popularity, a great podcasting business could be worth its "weight" in gold. Interestingly, podcast listeners tend to be younger, with 84% of them under 55 years old, and many of whom skew male. This could make it much more attractive to advertisers. And, since listening to a podcast is much more convenient, for us at least, we find that we tend to spend more time on listening to podcasts than on other mediums of entertainment like watching videos.

Podcasting is not the only growth driver that ETM has, however. Traditional radio is doing great too, just not in its original form. As the world shifts to digital, so has ETM. ETM's radio.com has performed very well recently and now makes up 10% of sales and is still continuing to grow at an impressive rate.

Radio.com has been the fastest growing digital audio app in the U.S. according to comScore for the last 10 consecutive months.

Q1 earnings call

Overall, despite many investors having the impression that radio companies will soon go the way of other old-fashioned companies like Blockbuster, radio companies are actually adapting to the times pretty well.

Significant insider buying

One other extremely bullish sign is heavy insider buying by CEO David Field and his father, Joseph M Field.

Source: Insiderinsights

Insider buying is a much more important factor for a smaller company like ETM which has an extremely high debt load and requires great management execution to survive. Heavy insider buying is a signal of confidence that management is willing to bet their own money that they can increase the value of the company, and the heavy insider buying of ETM stock is one major reason we are so optimistic about the company.

Valuation

We believe FCF is the best way to value ETM as it doesn't have too many one-time charges, and most of these charges are non-cash charges. ETM made around $72mil in FCF in 2018, which means that it's trading at 12x FCF. This is quite high for a radio company. However, since there are still synergies to be captured and growth opportunities to be exploited, we believe this is a reasonable multiple for ETM since it is likely to grow FCF significantly in the next few years, especially with its great history of no bankruptcies and capable management.

Takeaway

Overall, ETM is a solid buy, with capable management who are invested in their own business and many growth opportunities to exploit. It helps also that the valuation is not overly expensive and the company also pays a dividend. We believe that there is significant upside to ETM, though investors should be careful with highly leveraged companies.

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.