Hemisphere Media Group: A First Look

Summary

  • Shares of Spanish language media concern Hemisphere Media Group, Inc. (HMTV) have fallen 70% since its abandoned secondary offering in November 2021.
  • The company’s acquisition of Pantaya has yet to result in a surge of subscribers but has raised its net leverage significantly.
  • However, with demographic tailwinds and trading at a price-to-FY22E sales ratio of under .7, the recent beneficial owner buying merited a deeper dive.
  • A full investment analysis follows in the paragraphs below.
  • Looking for a portfolio of ideas like this one? Members of The Insiders Forum get exclusive access to our model portfolio. Learn More »

Visual contents concept. Social networking service. Streaming video. communication network. 3D illustration.

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"It did what all ads are supposed to do: create an anxiety relievable by purchase." - David Foster Wallace, Infinite Jest

Today, we take our first look at a small media company that is headquartered about five miles from where I lived in Miami for a decade. The stock at first glance seemed potentially cheap on a price to sales basis and has had some significant purchases from a beneficial owner as well lately, after a big pullback in the stock. A full analysis follows below.

HMTV Stock Chart

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Company Overview

Hemisphere Media Group, Inc. (NASDAQ:HMTV) is a Miami-based Spanish language media concern servicing the U.S. Hispanic and Latin American markets. The company's portfolio includes five cable networks distributed in the U.S., two cable networks in Latin America, a broadcast TV network in Puerto Rico, and a streaming movie platform in the U.S., amongst other assets. Hemisphere was founded in 2013 (with roots back to 1954) and went public the same year after merging into special purpose acquisition company (SPAC) Azteca Acquisition Corporation, with its first trade conducted at $10.25 a share. Azteca went public in 2011, raising gross proceeds of $100 million at $10 per share. Hemisphere's stock currently trades at around $3.75 a share, translating to a market cap of around $160 million.

The company is capitalized by two classes of stock. The 20.7 million publicly traded Class A shares confer economic interest and one vote per share. The 19.7 million privately held Class B shares also bestow economic interest but ten votes per share and are convertible into Class A shares. Owing to this arrangement, Gato Investments LP controls the majority voting power.

Hemisphere Media: A Dynamic Portfolio

Company Presentation

Hispanic Market

Hemisphere is a pure-play on the ever-expanding U.S. Hispanic population that either can't speak English or would prefer to consume its content in Spanish. In the 2010s, 52% of the country's population growth came from this demographic, and that trend is expected to continue throughout the 2020s, with Hispanic Americans expected to total ~75 million by 2030, up from 60.5 million in 2020.

U.S. Hispanics represent 18% of the total television audience and 11% of the buying power in the country. One of the original Hemisphere assets, WAPA, is located in U.S. territory Puerto Rico, where the three top broadcasters (WAPA, Univision (UVN), and Comcast's (CMCSA) Telemundo) collectively garner 76% of household viewership versus 27% for Disney's (DIS) ABC, Paramount's (PARA) CBS, Comcast's NBC, and Fox (FOX) in the cable-dominated mainland. Puerto Rico is the largest American Hispanic market outside of New York and Los Angeles.

Assets

Pantaya Acquisition. To further extend its reach into this demographic, Hemisphere acquired the 75% of subscription video-on-demand service Pantaya it did not already own from Lionsgate for a cash consideration of $124 million in March 2021. Pantaya is the leading Spanish-language digital platform in the U.S., streaming movies and series to over 900,000 subscribers, a metric expected to grow to 2.5-3.0 million by YE25. It has the rights to 17 of the top 20 grossing films in Mexico since 2019. As part of the transaction, Pantaya continues to license Spanish-language content from Lionsgate's 17,000-title film and television library.

Cinelatino. The other original Hemisphere asset is Cinelatino, the leading Spanish-language cable movie network with over 17 million subscribers, mostly in Latin America, but also across the U.S. and Canada.

WAPA Assets. To serve the Puerto Rican demographic, the company owns three WAPA-titled assets, including the aforementioned broadcast television network, which is the market leader in Puerto Rico, producing 71 hours of original news and entertainment content weekly; WAPA Deportes, a sports television network in Puerto Rico; and WAPA America, a cable network servicing 3.3 million Puerto Rican and other Caribbean Hispanic subscribers in the U.S.

Pasiones. Hemisphere's answer to the Soap Opera Network is Pasiones, which provides telenovelas and serialized dramas from Latin America, India, Turkey, and South Korea to ~3.7 million subscribers in the U.S. and ~15.4 million subscribers in Latin America.

Centroamerica TV. Much in the same manner WAPA America services Puerto Ricans in the U.S., Centroamerica TV cable network targets Central Americans in U.S., boasting ~3.2 million subscribers.

Television Dominicana. The same can be said for Television Dominicana, which serves 2.2 million Dominican subscribers living in the U.S.

Partially Owned Assets. In addition to these wholly-owned assets, the company has a 40% interest in Canal Uno, the third-largest broadcast television network in Columbia, and a 25.5% share of digital media company Remezcla.

Subscriber Regression

Unsurprisingly, Hemisphere generates revenue from digital media and cable subscribers, as well as advertisers. Approximately 95% of its topline is derived from the U.S., with cable subscribers totaling 15.8 million at YE21, down 9% from 17.3 million at YE20 and down 19% from 19.5 million at YE19. Although not much of a revenue generator, Latin American cable subscribers totaled 29.1 million at YE21, up 3% from 28.3 million at YE20 but down 12% from 32.9 million at YE19.

Stock Price Performance

With few exceptions, thinly traded shares of HMTV spent almost the first ten and a half months of 2021 between $11 and $13 and remained that way through its 3Q21 earnings announcement on November 5, 2021. However, ten days later, Hemisphere announced a six million share secondary and its stock sold off 21% in the subsequent trading session, prompting the cancellation of the offering "due to market conditions."

Although the stock snapped back to recover its losses in the following trading session, the fact that the company was looking to dilute its shareholder base by 15% to refill its coffers after its cash purchase of Pantaya began to weigh on the stock for the balance of 2021 and into 2022, trading down to the mid-$5 range as it went into its 4Q21 earnings report.

4Q21 Earnings & Update

Unfortunately, that announcement only generated a one-day bounce in shares before resuming their downward trend. On March 8, 2022, Hemisphere delivered a 4Q21 loss of $0.03 a share (GAAP) and Adj. EBITDA of positive $15.2 million on net revenue of $56.8 million versus a gain of $0.24 a share (GAAP) and Adj. EBITDA of $22.0 million on net revenue of $46.9 million, representing declines of 31% at the EBITDA line and 17% at the topline.

For FY21, the company earned $0.28 a share (GAAP) and Adj. EBITDA of $48.4 million on net revenue of $195.7 million versus a loss of $0.03 a share (GAAP) and Adj. EBTIDA of $63.6 million on net revenue of $151.2 million in FY20. Although its topline grew 29% due to its acquisition of Pantaya, that same purchase caused its EBITDA line to decline 24%. Excluding political advertising - significant during the 2020 Puerto Rico gubernatorial election - and Pantaya, Adj. EBITDA was $63.8 million in FY21 versus $59.3 million in FY20. Considering Pantaya had 900,000 subscribers when Hemisphere purchased the remaining 75% in April 2021, with expectations for it to triple its subscriber base by YE25, the drop in Adj. EBITDA could be expected as Hemisphere finances its growth spurt. However, it does not appear as if that growth is materializing, as its streaming service had yet to achieve 1 million subscribers at YE21 and was down sequentially 4Q21 vs 3Q21.

This dynamic is at least partly a function of content and management stated that it expects to release 16 original series and many premiere moves in 2022; thus, a material increase in its cash content spend that should bolster subscribership. Also, it hopes to enter a few bundle deals with distributors during the year. Being included as part of a cable package would be new territory for Hemisphere, as none of its current subscribers are on a bundle. Other than those operational tidbits, no specific financial projections were provided for FY22.

Balance Sheet & Analyst Commentary

CEO Alan Sokol seemed genuinely perplexed as to why his company's share price was so low, believing it "did not in any way reflect the fundamental value and strength" of Hemisphere. In addition to a backsliding subscriber base over the past two years and the lack of financial visibility provided by the company, its balance sheet provides an additional clue, reflecting cash of $49.5 million and debt of $252.3 million, for net leverage of 4.2. The company does have access to an untapped revolving credit facility totaling $30.0 million. It generated only $4.5 million from operating activities in FY21 after producing $56.0 million in FY20.

With an average trading volume under 70,000 shares, it isn't surprising to see little Street support for Hemisphere. The only commentary in the past twelve months came from Wells Fargo, which rates the stock an outperform but lowered its price target from $15 to $13 after the 4Q21 report and business update. The analyst firm then lowered its price target to $12 a month ago. Guggenheim also follows the stock, rating it a buy - and participated on the 4Q21 conference call - but has not made public commentary for some time. On average, these two analysts expect Hemisphere to lose $0.47 a share on net revenue of $224.7 million in FY22, followed by a loss of $0.37 a share on net revenue of $246.6 million, representing top-line growth of 15% and 10% respectively.

Beneficial owner Edenbrook Capital has used the post-secondary-cancellation weakness as an opportunity to cost average. It has purchased nearly two million shares since mid-December 2021, upping its ownership position in the A shares to 4 million shares, or over 20% of the publicly traded class outstanding.

Verdict

Hemisphere may look tempting on a price-to-FY22E sales basis trading of under .7 (as well as an EV/TTM Adj. EBITDA of 6.5), but with net leverage of 4.2, low double-digit to mid-teen projected top-line growth, and no path to bottom line profitability until at least FY2024, there just isn't much to get excited about. Its assets could be attractive to a bigger conglomerate, but until the company can demonstrate some form of subscriber momentum, especially from Pantaya, the recommendation here is to stand on the sidelines.

"It is important to bear in mind that political campaigns are designed by the same people who sell toothpaste and cars." - Noam Chomsky

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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