During 2005, SGA missed its internal performance objectives. Investors suffered, as the stock during the year declined from $16.85 to $10.87, a drop of 35%. The stock is down another 16% year-to-date 2006, after reporting the poor 4th quarter and providing a poor forecast for the 1st quarter.
One might think that a company focused on building owner value would consider changing senior management in such a circumstance. After all, the company's stock trades today where it did in 1996--there has been no owner wealth created in a decade that shareholders can monetize or capitalize upon today. An owner today has received no dividends and is flat nominally for 10 years and down substantially adjusted for inflation.
SGA isn't run for its outside owners, however. Consider:
SGA's CEO saw his guaranteed compensation--his salary--increase from $512,500 to $530,000 in 2005, a 3.4% increase. Despite missing certain forecasts and budget, the CEO received a $400,000 bonus, nearly half of which is discretionary. From SGA's recently filed 8-K:
"On March 14, 2006, the Committee also approved the payment of a cash bonus of $400,000 to Edward Christian, our President and CEO under the Chief Executive Officer Annual Incentive Plan (the "Plan"). $225,000 of this amount was awarded based on the Company achieving net revenue and free cash flow goals for fiscal year 2005 established pursuant to the Plan. An additional $175,000 was awarded by the Committee, in its discretion, despite the Company's not achieving certain market revenue and operating margin performance goals. The Committee concluded, based on market conditions and a subjective evaluation of Mr. Christian's performance, that a portion of the potential bonus should be awarded under the Plan."
> Despite missing certain forecasts ... > ... a $400,000 bonus, nearly half of > which is discretionary.
At the risk of sounding like I'm changing my tune on Saga (I'm not), I'll grant you that point.
Compared to the over-publicized cases of "excessive" CEO compensation nationally, Saga's CEO isn't getting over-comped. However, given 2005's financial performance, that "subjective evaluation" that merited the additional $175k bonus was more than just "subjective," and not a good message to send outside shareholders hoping to see growth in value.
Saga remains a conservative, generally well-run company that's riding out an unfavorable glitch in business conditions and remains a stock well worth hanging onto, or well worth looking at for an upturn.
Grosse Pointe could help its friends more than a little by not allowing that limited number of uncorrected analyst estimates turn into negative "earnings suprises" each quarter. Time to start issuing Guidance again - these .08 and .13 per-share "misses" of numbers they allow to float uncorrected are killing us!
Bad quarter? The "big guys" soften the blow by warning us. Seems we deserve similar consideration, and that confidence would be reflected in a firmer price for the company's shares.
1) SGA's not a 'generally well run' company. In markets facing competition, SGA earns lower-than-industry margins and produces lower-than-industry growth and return on invested capital. SGA, more accurately, is a marginally run company. It's profitability (EBITDA, SOI, BCF) margins and return on assets and return on capital are industry standards or below. Its balance sheet management is horrendous, and its conservative nature has resulted in consistent taxes in an industry where participants rarely pay sizable taxes.
2) You refer to this status as an 'unfavorable glitch in business conditions,' suggesting the radio industry malaise is temporary. I disagree. The onus is on you. The old days of 7% radio growth, to which you refer, are dead. Radio is no longer a growth business; radio now grows at less than GDP rates and was negative in 2005. Year-to-date 2006, terrestrial industry revenues are down vs. 2005.
The business is mature, with no visible growth and dubious prospects for long-term growth. There's almost no prospect for return to the 'normal' industry conditions of 2X-3X GDP growth this industry experienced until a few years ago.
SGA makes poor capital allocation decisions, stemming from a CEO who's not qualified to run a public company, but instead is a radio industry veteran with no business perspective apart from his industry. He has insulated himself with two classes of stock (one he controls), and a rubber-stamp board. It's not permitted for directors or outside shareholders to question the CEO's decisions, poor as they may be. This is Ed's company and he's going to run it his way, as he alone sees fit. This is Ed's fiefdom. Just look at how his board indulged Ed's personal interest in Iceland (his heritage) by permitting his PUBLIC VEHICLE to buy and run broadcasting assets in that country for years and years. Talk about clueless narcissism.
SGA's growth, profit margins, and return on capital are industry average or worse, and he's horrible (blind and clueless actually) at making decisions in owners' interests. Witness his insatiable desire to keep adding size, even with acquisitions below SGA's cost of capital, and his unwillingness to part with assets at attractive prices. Instead, he buys at double-digit multiples of cash flow, even while his own equity languishes at 8X.
As a radio operator, Ed should be COO, and he should let a business man run the enterprise.
The results speak for themselves: for all this company's buying and buying, for all its cash flow produced during a decade, the stock trades where it was in 1996. Stocks can demonstrate irrational valuations for long stretches, to be sure. We're all looking for bargains that are mispriced. How many 'generally well run' companies, with the same senior management, have treaded water for 10 YEARS?