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Valuation Suggests This Risk Is More Than Priced In; Initiating Coverage at Buy, $7.75 PT

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Valuation Suggests This Risk Is More Than Priced In; Initiating Coverage at Buy, $7.75 PT Entercom Communications Corp. (ETM – $6.24*) Consumer: Media & Entertainment Buy; $7.75 PT; $884.8M Market Cap Coverage Initiated Wednesday, April 17, 2019 Downturn Killed the Radio Star? Valuation Suggests This Risk Is More Than Priced In; Initiating Coverage at Buy, $7.75 PT Zack Silver, CFA Summary and Recommendation 703-312-1804 We are initiating coverage of Entercom Communications Corp. (ETM) with a Buy rating and a 12- [email protected] month price target of $7.75 per share. We see ETM shares as mispriced even after factoring a Harry Warnick near-term economic downturn into our valuation framework. For radio broadcasters in general, 703-312-1845 we are intrigued by the idea of a "radio renaissance"—healthier industry dynamics (two major [email protected] players exiting bankruptcy), continued durability in audience reach, new growth opportunities with podcasting/streaming and sports betting, and a call option on deregulation. Despite our STOCK DATA enthusiasm, core advertising, which comprises over 75% of industry revenues, has been sluggish Market Cap (mil) $884.8 and would likely deteriorate further in a downturn. For ETM, however, our analysis suggests that 52-Week Range $5.16 – $10.95 the shares are significantly mispriced even after factoring in the impact of a near-term moderate 3-Month ADTV 1,398,259 Shares Outstanding (mil) 141.8 recession. Moreover, while we are comparatively neutral on the overall radio broadcasting Dividend Yield 5.86% industry, we believe ETM is best positioned to take advantage of a potential radio revival given Float (%) 84.7 its relatively low exposure to music-only stations, large market concentration, post–CBS Radio Short Interest 16,364,199 scale benefits, attractive digital offering, and lower leverage than the peer group. Beta 1.54 Enterprise Val. (mil) 2,454.0 Fiscal Year-End December Key Points EARNINGS DATA • Late cycle overshoot. Pro forma for the remaining CBS Radio synergies, ETM trades below EPS 2018A 2019E 2020E 5x free cash flow. We see this valuation as an overreaction to secular pressures for a 1Q $(0.10) $0.03 — 2Q $0.01 $0.31 — company that has produced more durable audience trends than many legacy media peers. 3Q $0.27 $0.28 — ETM generates virtually all of its revenues through advertising and is certainly exposed to 4Q $(2.81) $0.32 — cyclical risks. But, we believe the market has overshot the impact an economic downturn FY $(2.62) $0.95 $1.19 would have on ETM's equity value. Even after factoring in a moderate recession during our Estimates may not sum due to rounding. forecast period, we still see 30% upside potential. Moreover, we believe the risk/reward FINANCIAL DATA skews favorably based on current levels. We see only 20% downside in a draconian scenario of a 2008/2009 repeat and over 90% upside assuming no recession between now and 2025. FY 2018A 2019E 2020E Adj. EBITDA $310.0 $363.0 $383.0 • Trading dynamics should improve. Amplifying late cycle advertising and leverage exposure (mil) fears are unfavorable trading dynamics, which we see dissipating soon. Specifically, we Revenue (mil) $1,463.0 $1,492.0 $1,535.0 believe iHeartMedia investors are hedging their exposure to radio as they await iHeart's forthcoming IPO by shorting ETM, which is the most liquid radio stock. We believe that this BALANCE SHEET DATA dynamic has sidelined new ETM investors but that this headwind is reaching a conclusion 4Q18 and has helped to create an attractive entry point at current levels. Cash & Equivalents $123.0 • Exposure to most durable areas in radio. While radio still reaches more Americans than Total Assets $4,020.0 any other advertising platform, our analysis suggests that after years of steady engagement Total Debt $1,872.0 $ in millions. trends, time spent listening (TSL) dipped in 2018. However, a closer look at the data suggests that news, sports, and talk TSL held up much better than music station TSL, which is facing increased competition from Spotify, Apple Music, Amazon Music, and SiriusXM/Pandora. ETM is our preferred pick in the group because it generates around 40% of its revenues from non-music content and is much less exposed to new music entrants than peers. • Call option on deregulation. During a period in which FCC deregulation has powered a sentiment lift and M&A wave for TV station owners, radio broadcasters have lagged behind. This is because much of the deregulation that would help radio falls under the FCC's Quadrennial Review, which the FCC will not complete until the end of 2019 at the earliest. However, we expect to see meaningful radio station ownership regulation modernization by the middle of 2020, which could provide a boost to radio broadcaster multiples. • Price target derivation. Our $7.75 price target is the probability-weighted sum of ETM's per share equity value in three different scenarios playing out between now and 2025: a moderate recession (80% chance), no recession (10% chance), and a "Global Financial Crisis 2.0" (10% chance). ETM also pays an annual dividend currently yielding 6%. Analyst certification and important disclosures can be found on pages 32 - 35 of this report. This document represents an abbreviated discussion of the subject issuer and should not be used as the sole basis for an investment decision. Contact your B. Riley FBR representative for complete research concerning the subject issuers, including research briefs and reports. Consumer: Media & Entertainment Investment Thesis No matter how fearful investors might be about secular pressures and late cycle risks for traditional advertising, there is a price for every form of positive free cash flow. At a current multiple below 5x free cash flow, ETM has reached a point where we believe investors need to step up. Contrary to the dire fears priced in at this valuation, we view Entercom as a company with a durable business model and several underappreciated growth opportunities. Our investment thesis starts with a comparatively neutral outlook for the radio broadcasting industry. Our view is that, while radio audience trends are more stable than both investors and advertisers typically give these companies credit for, we struggle to find reasons why investors, at this point in the cycle, should have meaningful exposure to an industry that generates 90% of its revenues from traditional advertising and is relatively over-levered. For the industry as a whole, these negatives, in our opinion, offset potential positives in tapping new revenue pools such as podcasting, streaming radio, and sports betting, as well as a likely loosening of radio ownership rules. However, for Entercom, its post–CBS Radio merger scale provides relatively high exposure to these positives. Thus, we see the company as better positioned to buck tepid top- and bottom-line trends than the rest of the radio group, and perhaps other legacy media peers, which does not seem to be reflected in its unimpressive valuation. We note that Entercom is also less levered than the overall group. While 2018 featured numerous headwinds to fundamentals that were either one-time in nature or a byproduct of the CBS Radio integration, we see 2019 as the beginning of a multiyear growth period, which we believe will help lift investor sentiment toward ETM shares. Regarding industry positioning, we see Entercom’s content mix—skewing toward local news and sports over more commoditized music fare—as providing a relatively larger defense against Internet behemoths (Spotify, Apple Music, etc.) and SiriusXM/Pandora than more music-heavy peers. While Spotify, Apple, and SiriusXM provide strong music and nationally skewing spoken word content, they are, at this point, not focused on local content. Moreover, Entercom is currently the leading sports radio broadcaster with over 20 million tuning in daily to its sports channels. In our view, this suggests that Entercom has an outsized opportunity to capitalize on the nascent sports betting advertising category. Given both sluggish traditional advertising trends and AM/FM audience growth, radio broadcasters have focused more investment dollars on digital offerings. Among potential drivers of incremental digital revenue are the proliferation of smart speakers, Internet-delivered streaming radio platforms, and new made-for-digital media such as podcasts. Entercom says that its Radio.com Internet-streaming product is the fastest-growing digital audio app in the U.S. Importantly, given Entercom’s focus on the news, sports, and talk genres, Radio.com provides a differentiated offering to both consumers and advertisers. Entercom’s ability to leverage Radio.com in concert with scale- enhanced relationships with national brands should help power digital revenue growth beyond the peer group and help to offset tepid legacy revenue growth. Additionally, we see a meaningful hidden asset in Entercom’s 45% stake in Cadence13, the second-largest podcasting company (by monthly downloads) in the U.S. Entercom carries this investment on its balance sheet at just over $10M. However, given the valuation bogey Spotify just provided with its acquisition of podcasting studio Gimlet Media, we estimate that the actual value of Entercom’s stake in Cadence13 could be closer to $100M. We believe ETM’s share price has been under pressure since the CBS Radio merger due to reasons beyond fundamentals—a one, two punch of unfavorable trading dynamics that we see subsiding by the end of 2Q19. First, CBS and Entercom structured the CBS Radio transaction so that CBS split off its radio business to existing CBS shareholders. Presumably, many existing CBS shareholders that became Entercom shareholders jettisoned their shares in 2018, which amplified the reaction to Entercom’s fundamental woes in 2018. While results have improved since, Entercom shares are facing a new demand headwind related to the iHeartMedia restructuring.
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