8/31/2010

Jae Jun’s from oldschoolvalue .com had a question on ETM

Excellent site:  OldSchoolValue

I also bailed but way too early on ETM.


My thesis has nothing to do with insider activity. But it’s nice to see a huge insider purchase especially given all the negative coverage by Standard & Poor's, Morningstar, Ned Davis and others.

At first pass the stock looks horrible in a troubled industry. Radio has been one if not the worst performer at least up to the end of 2008 over the prior 5 to ten year period.

So it’s a bit of a contrarian play but way more importantly its trading at what I believe is a discount to normalized earnings .Furthermore, management has been wisely allocating capital. The over reported and emphasized earnings number has been anemic and erratic at best. But what they have accomplished with their tremendous free cash flow is what I believe is a useful allocation of capital! Total debt was 956,166,000 at the end of 2006. ETM reduced that balance by 20% to the current 06/30/10 balance of 776,928,000. Furthermore, the share count was reduced from 46,045,438 at the end of 2005 to the current balance of 35,289,531.

FCF averaged an annual rate of 97,892,200 for the 5 year period ending 2009.

The per share EV is currently 27.25. EV per share = 5.5 price (35,720,000 shares outstanding)= 196,460,000 +total debt 776,928,000 = 973,388,000 or 27.25 per share in EV.

This is a weak analysis but if they can earn just the average annual FCF from 2005 to 2009 it would put a nice valuation on the stock. FCF/EV = 97,892,200(Avg annual FCF 05-09) / 973,388,000(EV) = ~10% FCF yield. But something tells me politicians will not cut back on advertising this fall so advertising profits may spike and push the stock higher. ETM was 30 share in 2005 and over 40 in 2004 with a dividend.

I thought the idea was worth a mention and something different. Companies that allocate their capital to both share buybacks to reduce share count and debt reduction as a group will outperform.

Good luck

1 comment:

Jae Jun said...

Cool. Thanks for the follow up.It's always interesting to see how somebody else would value the same company.

I basically got into ETM last year for the very same reason - FCF yield.

The debt was being reduced and each quarterly report showed lowering o interest expense and of the radio companies I considered it to be best of breed.

Another idea that I've been discussing with another person is SALM. Debt was refinanced last year and compared to ETM who's debt will mature in a couple of years at which point their loan terms is likely to go up since ETM was able to receive an awesome deal the first time around, SALM at the moment looks to be cheap.

Just another thought.