Townsquare Media Appears To Be Oversold
- Radio advertising will be down in 2020, but by how much?
- Townsquare Interactive is the wildcard for 2020.
- Investors want clean balance sheets in uncertain times, and Townsquare has areas of concern.
Townsquare Media (NYSE:TSQ) has done a lot of things right since my previous article a year ago, yet the common stock has failed to pay off for investors.
To be fair, prior to the coronavirus impact on the overall stock market, the stock was up almost 100% since my previous article. Subsequently, it has dropped below the price of a year ago as investors weigh the impact of the economic slowdown.
Townsquare Media is centered on 321 radio stations serving 67 small and mid-sized markets, located in largely rural areas. The radio advertising business has historically been the lead earnings driver for Townsquare, supplemented by its digital marketing solutions and its live events segment.
Townsquare Interactive provides advertisers websites and services to complement its other radio and digital advertising purchased through Townsquare. These websites and services are targeted at small local businesses, at an average cost of $300 per month.
The live events segment is meant to further complement advertising, providing more local, live brand strengthening events for small businesses in the community.
2019 was one of the best years in company history. As noted in the fourth quarter conference call, the fourth quarter marked the eighth consecutive quarter of net revenue growth. Profit margins increased across operating segments (live events, interactive, radio advertising) on an ex-political basis. In reviewing the three segments in detail, let me attempt to come up with a fair value to help determine if a 50% discount in the stock price is warranted.
Radio advertising will be down in 2020, but by how much?
The radio business was healthy in 2019, even in a non-political year, showing continued growth. Radio advertising will be hit in 2020 by the coronavirus shutdown, and indeed CEO Wilson addressed that on the fourth quarter conference call on March 16th:
As it relates to the Advertising segment, it's been very different by market and we haven't really seen as much of an impact vis-à-vis the live events as we have in advertising, but we did start to see cancellations and pauses at the end of last week, particularly around concerts and events as well as sporting events and other related businesses like gambling given the cancellation of the March madness and other events like that.
Advertising revenue will be down in 2020, but is that enough to justify a 50% drop in the stock price? A bull could argue that because Townsquare advertisers are primarily located in small markets that are seemingly less impacted by COVID19 closures, they may be more able to open up earlier than large metro markets. In addition, in the third quarter conference call, it was confirmed that only 10% of the company's revenue comes from National advertisers, so its advertisers are predominantly local businesses in medium to small markets. 2020 is also a presidential election year, so there will be a bump up in political advertising in the second half of 2020.
It might turn out that Townsquare's advertisers are 'stickier' than most, because (according to the 4Q call) over 70% of its broadcast clients bought more than just radio in 2019. These advertisers also purchase complementary digital advertising to help strengthen their relationship with Townsquare.
In thinking about the future macro environment of radio advertising in the coming quarters, the case could also be made that in an economic downturn, more people will rely on free advertising supported radio as they cut off their costly satellite radio or music streaming services. This trend could provide a possible tailwind. Pessimistically, a macro headwind for radio is the work from home trend. A 2018 Edison Research report shows that 54% of radio listeners listen to radio only in the car. Assuming some level of the work from home trend is permanent, this environment will adversely affect radio listenership through reduced drive time. Arity research reports total miles traveled is down 50% countrywide. In addition, Townsquare has a large market presence in Texas, a state in which unemployment will be severely affected by the economic impact of low oil prices.
BIA Advisory services cut their estimate for radio advertising by 13% for 2020 due to COVID-19. For my advertising revenue estimate for FY2020, I will use a more conservative 20% drop factor for Advertising Revenue for 2020. Using this value, I estimate 2020 advertising revenue at $281 million.
Townsquare Interactive is the wild card
The growing Townsquare Interactive website and web services subscription business should go a long way towards dampening the downdraft in advertising sales. Companies pay on average $300 a month for the web services, and this is a nice sticky subscription business that has been growing at roughly 25% a year.
CEO Wilson addressed this business in relation to the coronavirus in the Q4 conference call:
... our Townsquare Interactive business, to your point, remains quite sticky. We have seen no change in sales velocity on a daily basis nor have we seen a change in cancellations
On the same call he stated:
In the first quarter of 2020, even with the current situation with the coronavirus, we still expect to add approximately 900 subscribers for Townsquare Interactive.
Arguably, this statement was made early on (March 16th) in the coronavirus impact on the economy, so that may be optimistic in today's world. If Townsquare Interactive can continue to grow relatively unabated, however, this subscriber realization will be an amazing feat.
Looking at it pessimistically, Townsquare's customer base is made up of small to medium-size businesses, businesses that are hard hit by the economic shutdown. According to a report in the US Chamber of Commerce dated 4/3/2020, 43% of small businesses say they are 3-6 months away from permanently shutting down, 24% say they are two months or less from closing permanently, and 1 in 10 that say they are less than 1 month away from permanently shutting down. If we take the midpoint number, 24% and apply this to Townsquare Interactive subscriptions, this alone would knock out 3,800 subscriptions, or by my math approximately $8 million in revenue assuming an average of 7 months lost in 2020 per subscription.
Because of the stickiness of the business, I am going to lean on the optimistic side here and assume zero growth/loss in subscriptions in Q1 and Q2, and an impaired (compared to 2019) +600 subscriptions in Q3 and Q4 of 2020. Using that math, assuming the $300 a month price holds up, I come up with Townsquare interactive revenue of roughly $67 million for FY2020.
Live Events: Try not to lose too much money
The only segment that did not show growth in 2019 was the live events segment, which was expected as the company has been shrinking the footprint of that business. In an excellent display of timing, the company completed the sale of its live music festivals assets to a subsidiary of Live Nation during the second quarter of 2019.
In 2019, the revenue for Live events was approximately $17 million, with the second quarter of each year typically its busiest quarter. I guess it is possible that local community events draw share from big stadium events and large music festivals in this coronavirus world, but I am not counting on it. This year I am just hoping it doesn't lose too much money, and will put a zero on the revenue number for 2020 for this segment.
Balance sheet concerns
With all the uncertainty in the current investing environment, companies with pristine balance sheets earn a premium. Townsquare's balance sheet has been improving over the last few quarters, but it still would not be considered a positive. In 2019, they achieved the lowest debt leverage in company history, however, it is still at an unattractive 4.65 times based on 2019 EBITDA of $102.4 million.
Townsquare has a covered ratio of 2.16, Total Debt to Equity at 173%, and a dividend payout ratio of 120%. Should revenues and income severely drop off in 2020 as expected, these numbers show cause for concern. The current dividend yield is 6.5%, and given the dividend payout ratio, it would not surprise me to see a dividend cut or suspension this year. The good news here is that the company's debt maturity is out a few years. On March 20th, Townsquare drew down on its 50 million line of credit with a maturity of 2022, and roughly half of Townsquare's long-term debt matures in 2023.
Another balance sheet warning sign includes a pending intangible write-off expected as part of a financial audit. As per the fourth quarter conference call:
Upon completion of our audit, we may recognize a non-cash impairment charge to our intangible assets and any such non-cash impairment charge could be material.
The company's annual report is already late and Townsquare filed for an extension with its bank. In addition, it received a notice of non-compliance with the NYSE. These issues will only raise concerns with investors already focused on clean balance sheets.
Townsquare had negative earnings for the past several years and so it is difficult to value it on earnings metrics. Therefore, I will base my valuation off revenue using PSR (Price/Sales ratio).
The revenue estimate for 2020 published on Seeking Alpha is $380 million, with a range of $336-$440 million. Upon totaling my revenue estimates for the 3 segments, I come out on the slightly pessimistic $348 million revenue estimate for 2020.
The 3-year median PSR for Townsquare is a quite low .46:
I will take the median .46 PSR, and knock off 20% due to the balance sheet quality concerns stated above, to come up with an expected .36 PSR at year-end. Using my factors, this gives me an estimated year-end share price of $6.70.
With the stock trading below $5, I think the risk/reward on investing in this stock is present. Assuming the price stays under $5 (or better yet under $4.50), I will likely initiate a small position in the next few days even with all the current unknowns. There are plenty of question marks, but I believe the market has more than priced them in. My core assumption is that Townsquare Interactive will retain its subscriber base and advertising rates will hold up reasonably well. Risk-averse investors should wait until after first quarter earnings are reported, when many of the questions and assumptions I have made should be answered. The downside risk appears to be more than priced in and acting before more clarity is revealed may result in out-sized gains.
This article was written by
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