Entercom: Take This Gift From Mr. Market

Summary

• The coronavirus is unlikely to have a long-term impact on ETM, even if it does depress revenues  for 1-2 quarters.
• Management is forecasting revenue and profitability growth in 2020 from strong political ad spending.
• Growth initiatives in podcasting and Radio.com seem to be working.
• The valuation is incredibly low, and insiders are scooping up shares like mad.

As investors start fleeing into safe havens, Entercom Communications (ETM) has been hit extremely hard. The stock has been battered to levels not seen since 2008 despite reporting decent results in Q3 and Q4. We believe the current price represents a fantastic buying opportunity for a company that has strong cash flow and is executing well on its growth opportunities.

Opportunity

Recently, the spread of COVID-19, along with a massive drop in oil prices, sent investors rushing out of the riskiest assets - leveraged companies, unprofitable companies, etc. - into safe havens like treasuries, gold, etc. ETM, which had a lot of debt, fell in the "risky asset" category and was sold off.

However, we believe this steep selloff is highly unwarranted. ETM will likely not be affected much by the steep drop in oil prices, and while it is possible that the US could plunge into recession for 1-2 quarters due to COVID-19, we believe the impact will subside by the end of 2020. Most of its debt doesn’t mature until 2024, so even if cash flow is depressed for a quarter or two, ETM should be fine. Recently reported Q4 results were also quite encouraging.

2019 results and outlook

Q4 2019 marks the end of a turnaround year in which ETM completed the integration of CBS Radio, scaled up Radio.com, and became one of the largest podcast companies in the US.

In Q4, both revenue and profitability continued to grow, with revenue up 3% ex-political and adjusted EBITDA up 2% compared to last year. The increase in adjusted EBITDA was mainly due to the $100 million in synergies from the completion of the CBS Radio integration program.

During 2019, we completed the CBS Radio integration program, which generated over $175 million of gross cost synergies and about $100 million of realized net cost synergies through the end of 2019. We’ll recognize another $25 million of synergies from 2019 actions during this year and we are already hard at work to finding the next round of initiatives to continue to transform our cost structure and adapt to the rapidly evolving advertising landscape.

Source: Q4 2019 call

ETM expects synergies from 2019 to contribute to another year of solid adjusted EBITDA growth in 2020.

The podcasting segment continues to do well, generating 2 billion in annual downloads at the current annual run rate, with revenues exceeding management's guidance.

Our podcast revenues came in for the quarter at $12.4 million versus our guidance range from $10 million to $12 million.

Source: Q4 2019 call

We continue to be very optimistic about this fast-growing market, which is forecasted to grow to over $1.6 billion by 2022. As one of the largest players in the market, we believe ETM will be in a position to generate substantial revenue growth from its podcasting initiatives.

In 2020, ETM expects to show continued growth in revenues and adjusted EBITDA. Political spend for the upcoming elections is expected to contribute to revenue growth this year. Considering the spread of COVID-19 in the US, we now believe that Q1 and Q2 results would likely be lower than expected, though we hope for the situation to be resolved before the end of the year.

As a result, we expect to generate solid revenue, EBITDA and free cash flow growth in 2020 and continue to build on our five consecutive quarters of growth.

Source: Q4 2019 call

Overall, ETM has been making good progress on its growth initiatives. Radio.com, Podcasting, Entercom Audio Network, etc. have all grown substantially in 2019 and will likely do just as well in 2020. This, combined with strong FCF from the radio business, sets the company up to create substantial value for shareholders.

Valuation

At the current share price of $2.63, ETM trades at a market cap of just around $362 million. This is despite the company generating over $100 million of FCF in 2019, with more growth projected in 2020. This represents a P/FCF ratio of just 3.6x, which is incredibly low even for a cyclical radio company. Even when you include the debt, EV/EBITDA is less than 6x. Note that ETM is showing both revenue and profitability growth.

It's also nice to see that since the stock has fallen below $4, the Fields have been buying again, with 3 buys over the past week even though they already have close to 15 million shares. This increases our conviction that ETM is incredibly undervalued.

(Source: InsiderInsights)

At the current price, the dividend yields 3% despite using up only a small portion of cash flow. Management's priority now is currently to pay down debt, so the fact that the company can still maintain a dividend shows how strong its cash flow is.

Takeaway

Overall, we believe the massive decline in ETM is completely unwarranted, and we are taking advantage of this to buy back our position at a lower price. Our research on the coronavirus shows that it is very unlikely to have an impact on ETM over the long run, yet the stock is trading at its lowest valuation since 2008. We remain very confident regarding the long-term future of ETM.

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