May 18th, 2005
Analyst: Naveen Sikka
Ian Madsen, MBA, CFA, Editor
1-800-767-3771 ext. 417;
North Wacker Drive Chicago, IL 60606
Entercom Communications (ETM-NYSE) $32.28
Overview
Entercom Communications Corp. (Entercom) is a radio broadcasting company whose business is focused on the acquisition, development and operation of radio broadcast properties throughout the United States. As of December 31, 2004, the Company owns or operates radio stations in the following markets: Boston, Massachusetts; Seattle, Washington; Denver, Colorado; Portland, Oregon; Sacramento, California; Kansas City, Missouri; Milwaukee, Wisconsin; Providence, Rhode Island; Norfolk, Virginia; Indianapolis, Indiana; Greensboro, North Carolina; New Orleans, Louisiana; Memphis, Tennessee; Buffalo, New York; Rochester, New York; Greenville/Spartanburg, South Carolina; Wilkes-Barre/Scranton, Pennsylvania; Gainesville/Ocala, Florida; Wichita, Kansas; and Madison, Wisconsin. The programming formats of these radio stations include news, talk, classic rock, adult contemporary, alternative, oldies and jazz. The Company is based in Bala Cynwyd, PA and employs over 1,700 people. For more information about the Company, visit its website at
Analysts have identified the following factors for evaluating investment merits of ETM.
Key Positive Arguments / Key Negative Arguments- 30-second ad acceptance is improving
- Company has industry-leading ROIC and leverage
- Company’s markets continue to grow at a quicker pace relative to the peer group
- Company has noted market share gains (and revenue gains) in CCU-penetrated markets
- Company continues to aggressively buyback shares; nearly finished 3rd-$100MM buyback authorization in the past year
- Company plans to accelerate its rollout of digital radio; HD technology should be fully implemented by 2006
- Format changes expected to negatively impact the top-line by as much as 100bps going forward
- Company has a history of making high-priced acquisitions; analysts fear this might happen again as radio operators remain at relatively high levels
- Company recently issued what analysts coined as “disappointing” Q2’05 guidance
- Company faces long-term technology risks from competing products such as the iPod, internet radio, and satellite radio
- Company continues to be investigated for its record company promotional practices; some analysts have raised forward legal expense estimates
The Company recently reported strong Q1’05 results. Operating EPS came in at $0.27, in-line with the street consensus. Same-station revenue growth was an impressive 5.9%--almost 100bps ahead of consensus and nearly double the industry average. Operating expenses grew by only 3.4%, versus management’s prior guidance of 4% growth. EBITDA of $31MM was largely in-line with analyst’s estimates, with about $0.7M used for increased legal expenses. The Company also noted market share gains in 13 of the 18 markets it operates in. Management provided guidance for Q2’05 which some on the street viewed as a mild disappointment. The Company sees same-station revenue growth of 4% with operating expenses growing by an equal 4%, meaning nil EBITDA growth expectations. Analysts believe the forecast for a sequential decrease in revenue growth is largely due to format changes being implemented at several stations. Analysts expect the company to show accelerated revenue growth after Q2.
Revenues
Total Net Revenue
Fiscal Year Ends: December$ in millions / Q1’05A / Q2’05E / Q3’05E / Q4’05E / FY2005E / FY2006E
Digest High / 94.3 / 120.6 / 119.8 / 117.4 / 451.4 / 477.9
Digest Low / 94.3 / 119.5 / 115.5 / 113.9 / 443.2 / 459.4
Digest Average / 94.3 / 119.9 / 117.8 / 115.6 / 447.5 / 470.5
Digest Average YoY Growth / 8.39% / 5.45% / 4.67% / 4.87% / 5.67% / 5.14%
Analysts are forecasting mid single-digit revenue growth for the next 1-2 years as the Company posts stronger-than-industry-average same-station revenue gains. Industry growth is expected to be around 3%, however, ETM will likely grow around ~5%. Analysts point to efficient turnaround time in implementing format changes, an aggressive move by the Company to sell 30-second ad time slots, and increased market share gains in most of its markets as reasons for the optimistic top-line forecasts.
Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.
Margins
FY2004A / FY2005E / FY2006EOperating Margin / 34.48% / 34.86% / 35.45%
Operating margins are forecasted to expand modestly over the next 12-24 months. Analysts believe the Company will benefit from strong pricing power in the 30-second add campaign, a tight control of operating expenses, and lower legal expenses as the NY attorney general’s investigation into record company promotion practices winds down.
Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.
Earnings Per Share
Fiscal Year Ends: December$ in millions / 1Q05A / 2Q05E / 3Q05E / 4Q05E / FY2005E / FY2006E
Zacks consensus / 0.27
Digest High EPS / 0.34 / 0.52 / 0.51 / 0.52 / 1.85 / 2.12
Digest Low EPS / 0.26 / 0.48 / 0.44 / 0.42 / 1.61 / 1.76
Digest Average / 0.29 / 0.50 / 0.49 / 0.45 / 1.72 / 1.94
Digest Average YoY Growth / 26.4% / 5.9% / 17.9% / 13.7% / 14.5% / 12.3%
Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
Target prices for ETM stock range from $36 to $43 with an average of $39.08. The most common valuation method used by the covering analysts involves a DCF analysis.
Please refer to Zacks Research Digest Spreadsheet for further details on valuation.
Long-Term Growth
Long term growth rates for ETM range from 7% to 19%. The Company’s long-term growth is contigent upon successful market share gains in its 18 radio markets, continued acquisition growth, a successful transition to HD digital radio, rate improvements in the pivotal 30-second ad category, and a healthy advertising market in the US. Risks to growth include technology pressures from rival radio mediums; namely from the rising popularity of satellite and internet radio, and the country-wide craze for the iPod, as well as a weakening US economy (which would pressure advertising rates). The Company is currently focused on stealing advertisers away from print media with its “shred” campaign, aimed at displaying the benefits of radio advertising over print media. Management has noted initial success in this campaign, which analysts believe might be a long-term growth catalyst for the Company. ETM faces intense ongoing competition from its much larger rival, Clear Channel (CCU:NYSE). Analysts believe management is capable of executing on its growth strategy using both acquisitions and organic initiatives to help steal market share away from CCU.
Individual Analyst Opinions
POSITIVE RATINGS
AG Edwards (05/09/05) – The stock is rated a BUY with a $40 price target. Analyst believes mid-cap radio operators such as ETM will be the main benefactors of further consolidation in the industry. Analyst notes that ETM’s strong balance sheet put it in a lucrative position to pursue future acquisitions.
Lehman (05/09/05) – The stock is rated OVERWEIGHT with a $36.50 price target. Analyst likes the Company’s focus on repurchasing shares instead of acquiring overvalued radio assets. He believes the Company’s strong leverage and ROIC are other positives for the stock.
Wachovia (05/09/05) – The stock is rated OUTPERFORM with a $36-38 price target range.
NEUTRAL RATINGS
B. of America (05/09/05) – The stock is rated NEUTRAL with a $36 price target. Analyst believes ETM will continue to outperform industry growth rates, however, at present time, he feels share provide little upside given current valuation.
Barrington (05/09/05) – The stock is rated MARKET PERFORM with no given price target. Analyst notes that ETM is “a stock worth monitoring closely for a potential upgrade” due to strong management, execution, and finances.
Bear Stearns (05/09/05) – The stock is rated a PEER PERFORM with no given price target.
CIBC (05/10/05) – The stock is rated a SECTOR PERFORMER with a $40 price target.
Goldman (05/09/05) – The stock is rated IN-LINE with no given price target. Analyst notes that ETM remains his favorite “pure-play operator”, however, he remains neutral on the shares given a cautious stance on the industry in general.
Merrill (05/09/05) – The stock is rated NEUTRAL with no given price target. Analyst remains neutral on the stock given valuation concerns. He feels that less than 20% upside remains in the stock price.
RBC Cap. (05/09/05) – The stock is rated SECTOR PERFORM with a $43 price target.
Sanders, Morris (05/09/05) – The stock is rated a HOLD with a $39 price target. Analyst is cautious on the stock given current valuation and limited visibility into top-line growth.
Stifel, Nicolaus (05/10/05) – The stock is rated MARKET PERFORM with no given price target. Analyst remains neutral on the shares given the fact that the stock is already trading at a premium to the peer group.
Suntr. RH (05/09/05) – The stock is rated NEUTRAL with no given price target.
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