Entercom Communications: There Are Better Prospects Out There

One fascinating and exciting thing about being an investor is the sheer range of investment opportunities that you come by. This is true even if you ignore the world of alternative investments and stick solely with stocks. Case in point, we have a firm like Entercom Communications Corporation (ETM), a radio station broadcasting business with other related operations on the side. Over the past year, the company has gone through a rollercoaster of a ride, as COVID-19 threw it some very unexpected curveballs. With the crisis likely to come to an end as we get nearer to the bulk of the population taking a vaccine, there could be upside for a return to normalcy for the business. But even with that return, the fundamental condition of the business doesn’t appear to be all that great.

A wild ride

Entercom is an interesting business. As of earlier this year, the firm owned 235 radio stations nationwide. These included ones in 16 of the top 16 markets and ones in 22 of the top 25 markets. In fact, they own 7 of the top 8 all-news stations across the US. In addition to this, the company owns a wide range of assets like digital platforms (such as radio.com). It also hosts live events and in 2017 what was then its assets merged with CBS Radio, which is now a wholly-owned subsidiary of Entercom.

A flurry of activities over the years is why, when you look at its historical financial results, you see a great deal of volatility. Consider revenue. From 2015 through 2017, sales grew relatively modestly from $414.48 million to $592.88 million. Then, in 2018, its deal with CBS Radio and other deals it transacted pushed revenue to nearly triple that at $1.46 billion. In 2019, sales grew again, but this time by a small amount to $1.49 billion.

During this timeframe, the bottom line for Entercom was also volatile. After seeing profits rise from $28.43 million in 2015 to $231.83 million in 2017, the company turned to a loss of $361.44 million in 2018. That loss grew further to $420.21 million in 2019. Operating cash flow has also been all over the place, but thankfully not to the degree that profits were. These results can be seen in the chart below.

*Created by Author

Already, we have a company that’s a little hard to gauge. But then throw in the COVID-19 pandemic, and things get really complicated. Most of Entercom’s revenue comes from advertising. And a lot of that is tied to professional sports. With leagues either delayed, shortened, or cancelled altogether, the pain was noticeable. Just take the third quarter of its 2020 fiscal year. According to management, revenue for that quarter was $268.51 million. This represents a decline of 30.5% compared to the $386.14 million seen during the third quarter of the company’s 2019 fiscal year. Net income during this period tanked from $38.21 million to -$16.88 million. For the first three quarters of this year, revenue of $741.40 million was 31.1% below the $1.08 billion the company generated a year earlier. And its net loss of $79.83 million was a huge turnaround from the net profit in 2019’s quarters of $67.32 million.

Even operating cash flow for 2020 has taken a hit, though the decline it has seen pales in comparison to the hit Entercom’s profits saw. For the first three quarters of 2020, operating cash flow totaled $81.98 million. This is about 21.6% lower than the $104.54 million seen the same time last year. It is important to keep in mind changes in working capital though. Excluding these, operating cash flow so far this year would have been -$18.78 million. This compares to the adjusted figure for the same point in 2019 of $118.74 million. It is unclear, though, whether this disparity was just attributable to a timing of cash outflows and inflows, or if there’s something else going on here.

When you attempt to value Entercom, the company looks pretty attractive. Consider a scenario where the fourth quarter this year looks a lot like the fourth quarter of 2019, all relative to each year’s respective third quarters. This would give us operating cash flow of around $104 million for 2020. With a market cap of just $376.7 million, this implies a price/operating cash flow margin for the business of 3.62. That’s quite low, no matter how you look at it. If, however, you look at the EV/EBITDA multiple, this gets more complicated. Using 2019’s EBITDA, the company’s multiple is about 5.9. That’s not horrible, but if, instead, we use TTM (trailing twelve month) figures, this surges to 12.6. These two multiples place net leverage ratios on the firm of 4.8 and 10.3, respectively. At the lower end, this is elevated, while at the higher end it’s quite dangerous.

Takeaway

Right now, Entercom is an interesting turnaround prospect, but there’s a lot of uncertainty regarding the firm. A return to normal could result in some upside just based on pricing alone, but even then leverage looks lofty. Add in the fact that while a return to normal not too far out from now is highly probable, and this is good, but even from a fundamental perspective the company doesn’t look like an excellent business. Because of this, I believe there are probably better prospects out on the market, from a risk/reward basis, for investors to consider.

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.