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Beasley Broadcast Group

(Guest Commentary - July 13, 2006)

Dear Subscribers and Readers,

For those who had wanted to learn more about picking stocks and evaluating companies, I have invited our regular guest commentator Mr. Bill Rempel for a quick mid-week discussion of an individual stock that he likes (my schedule has been unexpectedly very busy and Bill has graciously offered to write a guest commentary this Thursday as well as next Thursday).  As I also mentioned previously, I will bring in another guest commentator for this weekend's commentary.  That guest commentator will be none other than fellow newsletter writer David Korn of Begininvesting.com and will be bringing us a quick analysis of the action during the September 1929 to June 1949 secular bear market (David has also been featured as a guest commentator previously).  In this commentary, Bill is going to discuss Beasley Broadcast Group – a stock which is also in the “old media” industry in the spirit of GCI.  Bill believes that the recent decline in BBGI is very much unjustified and that this micro-cap stock may be considered a “buy” for those who are willing to take the risk.  Without further ado, following is biography of Bill:

Bill Rempel (aka nodoodahs) is an active poster on the MarketThoughts forum as well as a few others around the web. Bill is a regular, monthly guest commentator on our website (see “Five-Month Review of Bill's 2006 Extravaganza of Predictions” for his last guest commentary). Bill graduated from Caddo Magnet High School (a high school for nerds) in back in 1985 and proceeded to learn the hard way when he drank his way out of a scholarship to Tulane later that year. After a few years of sweating for a living, he decided to go back to school, and graduated from LSU-Shreveport in 1995 with a Bachelors in Mathematics - all the while working the overnight shift stocking shelves in a grocery store.

Post-college, Bill has been in the P&C insurance industry as an actuary, product manager, and pricing manager. Bill and his wife Millie are amateur investors with a variety of holdings, but they prefer to buy and hold value investments. In typical "value" style, they live cheap, driving old cars and preferring to save or invest instead of buying fancy "stuff."

Disclaimer: This commentary is solely meant for education purposes and is not intended as investment advice.  Please note that the opinions expressed in this commentary are those of the individual author and do not necessarily represent the opinion of MarketThoughts LLC or its management.


You might say I'm in an "old media" mode.  After all, I have written about Gannett (GCI) and Entercom Communications (ETM) in the past several months.  However, it's just a sign that value stocks seem to come in sectors and in bunches.  The same sentiment shift that promotes the unwarranted sell-off of one good, profitable, "old media" company will promote the unwarranted sell-off of others, as well.  This month's column is about Beasley Broadcast Group (BBGI).  I feel I must apologize for the relative shortness of the column, but I am still recovering from vacation and regrouping into "normal" life.

BBGI came to me courtesy of my "short squeezer" screen, a modified version of the original Lucky 13 screen, just like ETM did.  Beasley has several characteristics of a likely value stock, including a P/E of 15.75, forward P/E of 17.85, P/S of 1.38, P/B of 1.94, and analyst's projected 5-year PEG of – whoops, there aren't any analysts making 5-year projections for BBGI!   Beasley's market cap is only $170 million, with a closing price of $6.96 per share.  They were too small to make the competitor list for Entercom, but they are a direct competitor.

Looking at the industry as Yahoo! sees it, Beasley looks relatively cheap.  Its metrics aren't outstanding, though.

Description

Market
Cap

P/E

ROE %

Div. Yield %

Long-Term Debt to
Equity

Price to
Book Value

Net
Profit Margin % (mrq)

Price to
Free Cash Flow (mrq)

Industry: Broadcasting - Radio (More Info)

33.5B

0.00

0.00

2.72

11.64

-2.94

-6.80

-313.8

Clear Channel Communications I (CCU)

15.7B

16.96

7.90

2.40

0.96

1.96

6.43

19.08

Sirius Satellite Radio Inc. (SIRI)

6.0B

NA

-230

NA

8.05

44.58

NA

-49.57

XM Satellite Radio Holdings In (XMSR)

3.6B

NA

-599

NA

88.16

317.05

-71.75

-22.13

Cox Radio Inc. (CXR)

1.4B

23.90

4.81

NA

0.32

1.12

14.33

-230.7

Corus Entertainment Inc. (CJR)

1.3B

NA

-0.46

1.10

0.72

1.70

-39.99

2.12

Entercom Communications Corp. (ETM)

1.1B

16.74

8.10

5.90

0.82

1.32

8.51

13.44

Citadel Broadcasting Corp. (CDL)

1.0B

16.56

5.21

8.10

0.58

0.84

10.13

16.62

Radio One Inc. (ROIAK)

732.4M

17.46

4.17

NA

0.93

0.71

3.16

128.35

Cumulus Media Inc. (CMLS)

607.1M

NA

-29.4

NA

1.01

1.07

1.14

33.35

Emmis Communications Corp. (EMMS)

552.2M

1.82

-5.58

0.00

1.92

2.02

164.46

-1.01

Spanish Broadcasting System In (SBSA)

331.7M

43.02

4.46

NA

0.80

1.00

141.74

-3.54

Salem Communications Corp. (SALM)

302.0M

24.31

5.07

NA

1.50

1.26

5.17

15.82

Saga Communications Inc. (SGA)

179.4M

18.03

8.06

NA

1.11

1.35

4.89

-33.18

Regent Communications Inc. (RGCI)

177.1M

NA

-2.53

NA

0.33

0.69

0.35

69.49

Beasley Broadcast Group Inc. (BBGI)

170.3M

15.84

12.66

3.60

1.64

1.96

6.02

-202.6

Worldspace Corporation (WRSP)

148.8M

NA

NA

NA

NA

NA

NA

-8.83

Grupo Radio Centro SA de CV (RC)

113.0M

11.49

11.14

0.00

0.11

1.19

19.18

NA

In addition to those, it has a short interest of 356K shares, up from 219K shares last month, representing 1.5% of the float and about 11.4 days to cover based on recent volume.  This stock has been hammered from a 52-week high of $16.90 and a 52-week change of -52%.  With an *ROA of 6.4% and an *ROE of 12.66% (*per Yahoo!), one wonders whether the shorts are on the wrong track. 

The story is obvious and basically identical to that of other companies in the "old media" sectors.  Satellite radio will replace terrestrial radio, iPods and other digital players will replace terrestrial radio, blah blah blah.  Is the selling overdone?

Old man Beasley was a seller at $14 late last year, but that could have been for tax reasons given that it was in November.  Beasley was a buyer at $8, however, as was Allen Shaw (a Director).  I don't consider the volume of the transactions to be very indicative, though.  This is a family business, and most of the directors are Beasleys.  Interestingly, Entercom Communications owns a fair share of Beasley stock.  The company leases towers and office space from companies owned by Beasleys, and uses corporate travel from a company owned by Beasleys.  This is all clearly shown in the proxies.  I certainly don't think that BBGI is a "clean proxy buy and hold" at this point, rather, it's more of a governance mess than anything else.  The high level of insider ownership puts shareholders at risk from a cashing out, so any long-term holders should be prepared for the inevitable down streaks – especially since the stock is thinly traded.

Looking at MSN Money's 10-year summary, the general story seems to be an improvement in revenues and earnings over time, with the volatility that comes with a small cap stock.  Remember this company owns and operates fewer than four dozen radio stations in ten markets, primarily in the southeastern U.S., including several religious and foreign language stations.  I assume those are mutually exclusive categories.

The company has generated consistent free cash flow, a consistent ROA, and has good earnings quality and cash generating power.  The cash flow statement shows the dividend only recently took affect and that the company has been a net payer of debt.  It also shows that they have wasted some money on stock buybacks over the last couple of years.  Interest payments on debt are taking a smaller slice of operating cash flow than they have in the past, but a somewhat big slice (28% of pre-interest OCF) which is to be expected considering the Debt/Equity of about 1.6.

The six-month chart shows the darnedest day on June 30, with a high daily range and over a million shares exchanged, which is about 30 times the previous average amount.  Since then, the price seems to have stabilized.  Today's high of 7.24 is the highest in 24 trading days, and today's close of $6.96 is above-average for that time period.  I'm seeing a contraction in range once the stock settled in on this area of support, with an RSI midpoint cross and what looks like an imminent 20/50 cross.  Plus, the price crossed the 50 DMA on a pretty lousy day for the overall market.  I especially like the positive divergences in PPO and RSI relative to price over the consolidation period.

Beasley Broadcast Group (BBGI)

The 3-year chart more clearly shows the extreme of the move made over the five months.  The consolidation of the last two months may signal that the selling pressure is over.  However, I would be cautious of any move below $6.50.

Beasley Broadcast Group (BBGI)

Disclosure: I'm in this stock as of yesterday afternoon.  I plan on using a generous volatility-based stop for both an absolute stop loss and as a trailing stop should this be the time that BBGI starts to climb.  If other opportunities arise and BBGI is still within three times it's average true range from today's close, I'll consider BBGI to be expendable.

As a true "value" play, BBGI has good, but not excellent, street cred.  The dumping of the stock early this year was due to an earnings "surprise" on 4Q2005, and while the second waterfall started before the general market meltdown, it certainly seemed to be exacerbated by it.  If one is willing to hold through the large swings that can come from a family-owned, very small cap, thinly traded stock, it could represent a very nice long-term holding.  The announced dividend of $0.25 per share represents about 3.6% yield, which could inspire one to hold for a while.  The earnings announcement is scheduled for the first week of August, and it should be interesting to observe the movement of the price heading into that date, considering the high short ratio.

Personally I would not hold this stock through a long vacation without a carefully placed stop.  While it has most of the elements of a good value stock, and while it is technically interesting at the moment, the "all in the family" nature of the ownership and governance would dissuade me from being perfectly comfortable with this stock.

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