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Getting On the Entercom

(Guest Commentary - November 2, 2006)

Dear Subscribers and Readers,

For those who had wanted to learn more about picking stocks and evaluating companies, I have again invited our regular guest commentator Mr. Bill Rempel for a quick mid-week discussion of an individual stock that he likes.  Bill just came back from vacation earlier this week but has graciously offered to write us a guest commentary within a very short time-frame.  As subscribers should know, Bill is a prolific writing on the stock market and individual stocks and is the midst of relocating his blog to: http://www.billakanodoodahs.com/

In this commentary, Bill is going to discuss Entercom a company which owns radio stations in many markets and that broadcasting in HD Radio (note that this should not be confused with satellite radio).  This is not so much a value play but a company with good potential at a reasonable valuation.  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 A Big Chinese Power: Huaneng Power International for his last guest commentary). Bill graduated from Caddo Magnet High School (a high school for nerds) 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.

On Friday the 13th of October, I placed an order to get on some Entercom Communications (ETM) at the open.  This is a stock I've been watching, in a space I've been watching, for many months now.  My initial review of ETM has gone to web rot at another domain name, but I do have reviews of other "old media" stocks such as Beasley Broadcast Group and Gannett up at MarketThoughts.

Entercom Communications (ETM) is radio.  Note the absence of the word "satellite" in their description, an absence which I think is a good thing.  Entercom owns and operates multi-station operations with an eye towards gaining leading positions in their markets.  Boston, Seattle, Denver, Sacramento, Portland, Kansas City, Indianapolis, Milwaukee, New Orleans, Norfolk, Buffalo, Memphis, Providence, Greensboro, Rochester, Greenville/Spartanburg, Madison, Wichita, Wilkes- Barre/Scranton and Gainesville/Ocala are their locations.  The programming options run the gamut from oldies to rock, news/talk to country, smooth jazz to sports, and their sports portfolio includes the Red Sox with a recently re-upped contract, the Seahawks, the Celtics, the Sabres, semi-pro teams like the Saints (who dat?), and various collegiate teams.

One of the major risks with a company in this sector is that it might eat something it disagrees with; acquisitions can be either accretive or excretive, but acquisitions do happen often in radio.

I had never heard of "HD Radio" until I initially researched this stock.  This technology permits a station to transmit radio programming in both analog and digital formats, and eventually in digital only formats, using the bandwidth that the radio station is currently licensed to use.  The company uses HD Radio in many markets and plans to expand that use.  They have purchased an equity interest in a technology company for HD Radio and are active in the promotion of HD in the industry.

Governance ain't great.  ETM has different classes of shares with different voting rights, which is always a pink flag, or at least a mauve flag.  It is still a very family-oriented company, with the chairman being the founder almost 40 years ago and the prezzie and See EEE Oh being "junior."  No nepotism here, eh?  One of the items on the proxy is an options exchange program.  Not a clean proxy, but not as bad as some I've read.

It appeared to me from the action of the past month that the downtrend is through.  I don't particularly trust v-bottoms, but this one has me convinced.  Early October gave us a five-month closing high, which I took as a good entry sign.

ETM (Entercom Communications Corp.)

On an earnings basis, Entercom (ETM) is not cheap or expensive.  The P/E is almost 19 on a trailing twelve month basis, and is close to 18 on a forward basis, which prices in some earnings growth for 2007.  The five-year PEG of 2.7 is pretty pessimistic and tends to point towards expensive, but the Price/Sales of 2.6 is mid-range and the Price/Book of 1.4 is cheap on an absolute basis.  When one looks at the projected 7.3% growth in a five-year period, reverting to 6% historic S&P 500 growth over the long term, one gets a target P/E of 19.7 at a 11.5% discount and a 12.1 target P/E at a 15% discount, so this is not a pure valuation play.  Out of the major competitors, however, it prices nicely, making a relative bargain.  Check out that dividend yield!  That's probably a good reason why it trades fairly high from a P/E standpoint.

Description Market Cap P/E ROE % Div Yield Debt/Equity Price/Book Net Margin
Clear Channel Communications 17.3B 19.07 7.84 2.20 1.00 2.21 10.67
Sirius Satellite Radio Inc. 5.4B NA -360.10 NA NA NA -158.47
XM Satellite Radio Holdings 3.1B NA -781.01 NA NA NA -100.54
Cox Radio Inc. 1.6B 24.95 5.16 NA 0.33 1.25 21.91
Corus Entertainment Inc. 1.6B 51.70 3.84 2.10 0.65 1.94 25.21
Citadel Broadcasting Corp. 1.2B NA -2.33 7.00 0.65 1.04 -66.54
Entercom Communications Corp. 1.1B 18.98 7.26 5.30 0.85 1.42 14.71
Radio One Inc. 670.2M 21.49 3.02 NA 0.93 0.65 8.28
Cumulus Media Inc. 462.6M NA -32.25 NA 2.00 1.20 5.38
Emmis Communications Corp. 460.4M 1.01 -9.11 0.00 0.98 1.17 112.38
Salem Communications Corp. 323.6M 15.86 8.09 0.00 1.42 1.28 19.92
Spanish Broadcasting System 304.5M 31.33 5.00 NA 0.79 0.91 4.98
Saga Communications Inc. 172.3M 15.94 8.62 NA 1.04 1.26 10.57
Beasley Broadcast Group Inc. 171.5M 16.73 11.66 3.50 1.59 1.95 9.84

The next earnings release is right around the corner, November 6th.  Consider that the short ratio was 13 days to cover on October 10th, and that daily volume is 33% higher in the last two weeks than it was in the last three months.  Of the nineteen! analysts, truly amazing for a stock this small, making estimates, the consensus estimate and the highest estimate are for a shortfall compared to last year.  Looking at the stock's price action, I would think there might be a whisper on the street.  I'm not betting on that, however.

Of the metrics that I calculate, I find a mixed bag.  I like that there's little dilution, and that earnings and cash flow are fairly consistent.  The dividend is high and is new, having been instigated just last year, but it is in a range that should be sustainable.  Earnings quality, cash generating power, and reliance on financing cash all check out as nice.  On the dark side, there is no tangible equity, the debt/equity is moving in the wrong direction, and the interest payments on debt are fairly uncomfortable for the amount of operating cash flow.

GROWTH MEASUREMENTS FYE 2001 FYE 2002 FYE 2003 FYE 2004 FYE 2005 TRL12M
REVENUES n/a 17.5% 2.5% 5.6% 2.1% -1.4%
INCOME n/a -580.9% -186.4% 5.4% 3.6% -19.9%
ASSETS n/a 9.0% 0.5% 5.8% 1.8% 0.4%
LIABILITIES n/a -0.7% -19.6% 23.2% 20.9% 13.2%
EQUITY n/a 17.8% 15.8% -3.4% -11.1% -11.4%
TANGIBLE EQUITY n/a -55.4% -19.0% 71.7% 48.8% 23.1%
             
PER SHARE MEASURMENTS FYE 2001 FYE 2002 FYE 2003 FYE 2004 FYE 2005 TRL12M
DILUTION PERCENTAGE 1.5% 1.6% 1.3% 0.6% 0.4% 0.6%
DILUTED EPS 0.37 (1.64) 1.37 1.49 1.69 1.57
DILUTED OCF 1.83 2.06 2.49 2.59 2.94 3.08
DILUTED FCF 0.17 (5.65) (0.40) 0.28 1.84 1.57
DILUTED DIVIDEND - - - - - 0.76
DILUTED BOOK 16.19 17.60 19.74 19.59 19.09 19.61
PERCENT INTANGIBLE 162.5% 123.7% 116.5% 129.4% 149.2% 168.3%
             
SOLVENCY MEASUREMENTS FYE 2001 FYE 2002 FYE 2003 FYE 2004 FYE 2005 TRL12M
LONG TERM DEBT / OCF 5.74 4.97 2.52 3.68 4.23 5.42
LONG TERM DEBT / FCF 60.96 (1.81) (15.62) 34.18 6.76 10.66
LONG TERM DEBT / EQUITY 0.65 0.58 0.32 0.49 0.65 0.85
INTEREST / OCF 50.1% 32.7% 17.0% 16.4% 19.6% 27.8%
INTEREST / FCF 532.5% -11.9% -105.4% 152.1% 31.3% 54.7%
DIVIDEND / FCF 0.0% 0.0% 0.0% 0.0% 0.0% 48.5%
             
EARNINGS QUALITY MEASUREMENTS FYE 2001 FYE 2002 FYE 2003 FYE 2004 FYE 2005 TRL12M
EARNINGS QUALITY 1.94 (15.51) 1.43 1.39 1.38 1.44
CASH GENERATING POWER 5.54 0.29 4.59 1.22 3.19 2.49
RELIANCE ON FINANCING CASH -4.9% 16.4% -6.5% -1.4% -5.5% -2.6%
INVENTORY / REVENUE 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
ACCT REC'L / REVENUE 19.3% 20.4% 19.8% 18.5% 17.8% 20.1%
ACCT PAY'L / REVENUE 3.3% 0.5% 0.4% 0.4% 0.3% 0.7%

All in all, it's not the most compelling value stock I've ever bought.  However, it has a combination of metrics, technicals, and dividend yield that make me feel it's worth a position in the portfolio for now.  I'll give it a little room and see what happens, and collect some dividends in the meantime.

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