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Entercom Communications Corp. Message Board

  • valubyer valubyer Sep 20, 2009 9:02 AM Flag

    Longtime....Lets talk balance sheets...

    I focus on quarterly income statements in analyzing stocks. But I also like to look at balance sheets.

    All of the radio stocks have lots of debt, and of course a huge part of their assets are intangibles.

    But there are some interesting differences. Below are the book values and market caps for the four radio stocks I own shares in: (Book Value, then Market Cap, in $Millions)

    June 2009 Balance Sheets, Current Market Cap:

    CMLS ($236), $80
    ETM $68, $175
    RGCI ($30), $20
    ROIAK $250, $45

    It is interesting that ROIAK has the strongest balance sheet by far, and has the next to smallest market cap.

    It could be that a less stringent valuation methodology has been applied to ROIAK's asset valuations, or it could be that it is just stronger from a balance sheet perspective.

    ETM (which I have the most investment in) is trading at about 3 times book value, while ROIAK is trading at about 0.2 times book value. No calculation can be done for the other 2 since they have deficit book values, but CMLS made the huge run, in spite of having the worst balance sheet.

    If CMLS can keep doing what they did in the 2nd qtr, the balance sheet does not mean much, and it makes it stranger that the took the huge writedowns of their assets.

    This is a very strange situation, particularly as it relates to CMLS. The percentage of companies that survive with negative book values of this magnitude I am sure is extremely small, and CMLS looks like it is the exception to the rule (regarding the necessity of a solvent balance sheet).

    Please comment Longtime. And thanks again for your insites. I hope my perspective is usefull to you also.

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    • Great post Longtime. It is pretty easy to see that if the four we are talking about simply repeat what they did in the June quarter, the stocks have to move much higher.

      It really seems just too easy.


    • I'm just really not paying any attention to the book values; they're pretty much meaningless. I am looking at EBITDA, cash flow, and "times interest earned," in relationship to operating income. You also have to keep in mind the cost cutting, and how companies like CMLS and ROIAK, that looked very much like they could be the "walking dead" 6 months ago, are now CLEARLY, or at least very highly likely, going to have their current equity holders' ownership position protected (with the exception of the small amount of lender warrants CMLS issued, to get their debt amendment).

      CMLS is interesting because it earned about 3x its interest expense, in Q2, in terms of operating income, whereas ROIAK earned only about 2x. On the other hand, CMLS's ad revenues were down worse than the industry average, in the 1st 6 months of 2009, whereas ROIAK's ad revenues were down considerably LESS than average. Furthermore, ROIAK has reduced its share base by nearly 50%, in the last 18 or so months, moreso than ANY other radio stock I am aware of, by far. The future accretion is enormous. They have the LUXURY of being able to STILL buy back stock and/or debt at a important luxury, when you consider that many other players in the leveraged radio space have had to commit to dedicating essentially ALL of their excess cash flow to direct debt reduction, in order to get necessary credit agreement amendments, to get out of "technical default." (ROIAK never even entered technical default, and probably will not. That's just fantastic!)

      Pick your poison; I expect EXTRAORDINARY gains from both CMLS and ROIAK over the next 3-12 months, in particular. (Both are still selling at only about 1.5x next year's earnings, by my estimates.) But, my bias is certainly clear. I own about 3x as many shares of ROIAK as CMLS, or over 1% of the total ROIAK shares outstanding.

      The story of the expected DRAMATIC OUTPERFORMACE of a radio stock like ROIAK is simple; 1) Restoration of the BULK of the lost ad revenues we've seen 2) HUGE cost cutting, the lion's share of which I expect to be permanent 3) drastic reduction in shares outstanding = accretion and 4) lower interest expense as a result of lower interest rates and total debt balances.

      Question: If ROIAK achieves record earnings, in a couple of years, of something on the order of, say, 70-80 cents annually., will they slap a 12 multiple on it, and have this stock sell for close to $10? I believe the answer is yes.

      • 1 Reply to longtimefollower
      • Not sure about ROIAK. The annual operating cash flow slid fairly consistently from 123 million in 2004 to 13 million in 2008. With ROIAK debt at 674 million I much prefer ETM, which has shown consistently improving long-term cash generation performance. ROIAK may become a turn around story but it has got a long way to go. ROIAK seems expensive at 75 cent considering it was only around $2 in Jan 2008. It is going to need prove that it can pay down debt to overcome its very long-term down trend.

    • I've been in the accounting business long enough to know that the reported book value of intangible assets is next to meaningless. It often comes down to last minute negotiations between mgmt and auditors based on uncertain forecasts, which are often tainted by the fear of the moment. In some cases when management is faced with a write-off they get aggressive and include as much as possible to avoid future write-offs. Others do not. And a lot has to do with your auditor relationship and diligence as well.

      In this industry it has long been a given that reported asset valuations are 98% useless. The only way to objectively value the assets of radio is to review historical cash flows and forecast forward. That is where ETM shines. Their assets have a long history of producing strong and growing cash flows approaching $4/share in 2008. With the addition of their aggressive cost cuts and debt reduction ETM has the most to gain as advertising recovers.

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