Packer16 Posted October 24, 2010 Share Posted October 24, 2010 After the last high risk play, this one is a little more straighforward. Salem is a Christian/conservative talk media firm with radio, publishing and online properties. A majority of its revenue comes from radio with a majority of the radio revenue from block programming which has a high renewal rate (90%+). As a result of the block programming and increase in online property revenues, Salem's revenue was down only 2% in 2009 (versus double digit losses for your typical radio station). As of Q2 revenue was up 4% versus an increase of 3% for Citadel (one of the larger other players). Management has been shrewd purchasers of online properties such as Tangle (purchased for a lower price 1 year after the original offer) and a Washington DC radio station for reduced price. The equity trades for 3.4x FCF. Debt interest coverage is about 2x. This is an illiquid stock but given its demographic, I think it will do better than other radio stations (whose LT growth rates are on the order of 2 to 3%). There is a good overview in the presentation section of the website. Packer Link to comment Share on other sites More sharing options...
ragnarisapirate Posted October 25, 2010 Share Posted October 25, 2010 Packer, long time no talk! Are you worried about the notes that are due in 2016? It doesn't seem that they can pay them off with c/f, so, are the PIK? What happens if interest rates spike in the next 6 years? Additionally, are the bonds trading right now? I would be interested to see what they are priced at right now, given that at par, they would yield just under 10%. Basically, what I am getting at here, is that there is no doubt that this company will have a decent return on investment, I am just worried about a return of investment. thoughts? Link to comment Share on other sites More sharing options...
Packer16 Posted October 25, 2010 Author Share Posted October 25, 2010 The notes can be prepaid by $30m per year until 2016. They plan on pre-paying the debt for the first option using a lower cost (LIBOR +350bp) bank loan. The bonds are fixed payment at 9.75%, an above market rate for about 2x coverage rate on a FCF basis and about 2x on an EBITDA - cap ex basis. One correction SALMs EBITDA declined by 2% and sales declined by 10%. If they use the FCF over the next 5yrs they can retire over $100m in debt. Last I checked, the bonds are trading at around par. I can do another recent check. This clearly is not at the $0.80 price of Aug 2009 when we spoke at the SNS meeting but it still is cheap. The other factor which I am hesitant to rely on but is a data point is they are less levered (5.5x EBITDA) than all other radio firms (ranging from 5.7 to 7.7x) except SGA (another interesting situation) (2.9x) and the recently restructured Citadel (3.1x). Packer Link to comment Share on other sites More sharing options...
ragnarisapirate Posted October 25, 2010 Share Posted October 25, 2010 The notes can be prepaid by $30m per year until 2016. They plan on pre-paying the debt for the first option using a lower cost (LIBOR +350bp) bank loan. The bonds are fixed payment at 9.75%, an above market rate for about 2x coverage rate on a FCF basis and about 2x on an EBITDA - cap ex basis. One correction SALMs EBITDA declined by 2% and sales declined by 10%. If they use the FCF over the next 5yrs they can retire over $100m in debt. Last I checked, the bonds are trading at around par. I can do another recent check. This clearly is not at the $0.80 price of Aug 2009 when we spoke at the SNS meeting but it still is cheap. The other factor which I am hesitant to rely on but is a data point is they are less levered (5.5x EBITDA) than all other radio firms (ranging from 5.7 to 7.7x) except SGA (another interesting situation) (2.9x) and the recently restructured Citadel (3.1x). Packer No doubt, this is very interesting. As with my thesis on UWN, it seems that there could be an interest rate shock and SALM could certainly weather it, provided that their banker doesn't call their loan. The thing that I love about these levered plays, is that you personally don't risk more than your principle (not even that, it seems, in the case of SALM), but, stand to profit all the outsized gains that leverage can provide... Kinkda like with Dollar Thrifty Auto. Link to comment Share on other sites More sharing options...
Packer16 Posted February 19, 2012 Author Share Posted February 19, 2012 VIC has a brief write-up on SALM that is lacking the details about the on-line growth and increased election revenue from the Repub primary. The decreased proftibaility over the past year appears to baffle folks but it is due to re-instating wage increases that were cut 2009 to deal with the downturn. It also has a good rationale for radio but does not mention EMMS which is just as cheap as SALM is but has more hair on it. They place a value of around $9 on the share around my fair value estimate. Packer Link to comment Share on other sites More sharing options...
Hielko Posted February 19, 2012 Share Posted February 19, 2012 Haven't really researched this yet, but when I look at the financials I see that they have been paying down debt from 361M to 277M (I like) the past 5 years but at the same time book value is also going down every year? Link to comment Share on other sites More sharing options...
Packer16 Posted February 19, 2012 Author Share Posted February 19, 2012 This is due to the mark-to-market valuation they do every year for their FCC licenses. However, they only mark them down but not up which is a quirk in the accounting. I have focused on the FCF generating ability of SALM as the BV can be distorted by the MTM accounting. Packer Link to comment Share on other sites More sharing options...
Hielko Posted February 20, 2012 Share Posted February 20, 2012 Makes sense, see that they even include a table in the 10K with some info on how much fair value exceeds carrying value, although it seems impossible to really do anything with it. What about the dual share structure? Seems to me that some discount is warranted since the A class shares have 1/10 voting power (even though insiders would control 50%+ anyway). Link to comment Share on other sites More sharing options...
Packer16 Posted February 20, 2012 Author Share Posted February 20, 2012 If you look at these for each of the public radio firm you can get some market info about the industry expectations. I actually have put together one of these analyses and it is typically vetted extensively by the audit firms. As to the dual class, I have not seen management take advantage of shareholders like I have seen in other radio firms (see Radio One for this) so it did not bother me and the large managemnet share does provide an incentive if they don't hose minority holders. Packer Link to comment Share on other sites More sharing options...
Hielko Posted February 22, 2012 Share Posted February 22, 2012 Decided to buy SALM, and posted an analysis of the company on my blog @ http://alphavulture.com/2012/02/22/salem-communications-salm/ (started to do this for every buy/sell decision). Link to comment Share on other sites More sharing options...
Hielko Posted February 23, 2012 Share Posted February 23, 2012 Something I found online and worth reading, a SALM restructuring plan from 2009. Gives some good backgroup on the trouble the company has been in: http://www.turnaround.org/cmaextras/Salem.pdf Link to comment Share on other sites More sharing options...
Packer16 Posted February 23, 2012 Author Share Posted February 23, 2012 Interesting data but this was a student project from U of W Business School. Not sure how much the concepts were vetted in the real world. The idea of lease-back shows some additional value I hadn't throught of. For some context, the time period it was written the marek thought radio was going to die and everyone was going BK. The debt pricng is also in an illiquid market and subsequently has risen to par. Of 11 firms that were shown in the industry 2 went BK and the rest have recovery or rebounded significantly. SALM's stock price was $0.53 when this was written. O for that price again. Packer Link to comment Share on other sites More sharing options...
Packer16 Posted February 24, 2012 Author Share Posted February 24, 2012 Hielko, I see by your blog you are professional poker player. So you may interested in Emmis as the firm has valuable assets and there is poker game going on between management and the preferred stock holders. I recently sold the pfd and bought the common aligning myself with management. Packer Link to comment Share on other sites More sharing options...
Hielko Posted February 24, 2012 Share Posted February 24, 2012 When I read the latest 8K of Emmis the preferred stock certainly doesn't sound attractive, wonder why/how they got so much voting power. Not sure how much your interests are aligned with management when you hold the common though: insider ownership is pretty low. Link to comment Share on other sites More sharing options...
Packer16 Posted February 24, 2012 Author Share Posted February 24, 2012 The company was able to buy back the preferreds because of a large redemption from a hedge fund that owns a majority of the preferred and other preferred holders willingness to give up shares. If you add up the common and remaining pfd at market you get an equity value of $50 million. EMMS also has a deferred sale of one of their LA stations to Grupo Central for $100 million wiht a $7 million annual LMA unitl sale. If you net this against the debt and add in the investments they have you get an EV of $152 million with an EBITDA of $29 million implying a EV/EBITDA of 5.3. If you put a 7.5x EBITDA multiple on this (similar to CMLS which is by no means expensive) you get a $1.76 share price. Another way to look at it via the BS is to add the $100 million plus $ 7 million of intrest to the assets and the resulting equity value is $128 million vs. a trding price of only $50 million. Before the buy-back the preferred was in the best posistion but since control is assured by mgmt, the common is now the right place to be. Management ownership is not high for the A shares but if you include the B shares it is higher than 10% of the company. Packer Link to comment Share on other sites More sharing options...
Packer16 Posted March 9, 2012 Author Share Posted March 9, 2012 SALM had a great quarter generating close to $20 million of FCF in a trough year and beating other radio comps in terms of growth. The online business is growing nicely and they just announced a 5% dividend. They will still be able to delever to 4x EBITDA by 2015 and provide the stated dividend. Right now they are at about 5x EBITDA. It looks they can re-fi in 2013 at a lower rate and generate more FCF. Given the market cap, the stock has FCF yield of over 30%, a dividend yield of 5% and growing revenues, EBITDA and FCF. They should also benefit from the Repub primaries and general election spending. Packer Link to comment Share on other sites More sharing options...
Hielko Posted March 9, 2012 Share Posted March 9, 2012 Good point about the refinancing possibilities, didn't know that, but see in the S4 that they can redeem their debt in dec 2013 @ 104.813% of par, 102.406% of par in 2014 and after that just at par. And they can redeem 30M/year before that at 103% of par (was already wondering how they managed to buy their debt back at that price). So far so good :) Link to comment Share on other sites More sharing options...
rijk Posted March 13, 2012 Share Posted March 13, 2012 what is driving the recent incredible run up? regards rijk Link to comment Share on other sites More sharing options...
Packer16 Posted March 13, 2012 Author Share Posted March 13, 2012 I don't know specifically but the stock was/is cheap with about $0.82 free cash flow for 2011 and beginning a $0.14 dividend. They should also be a beneficiary of the extended Repub primary and appear to have a plan to delever and provide a nice dividend similar to Seaspan. Packer Link to comment Share on other sites More sharing options...
Hielko Posted March 13, 2012 Share Posted March 13, 2012 Can't complain, but have to say it's a bit weird to see the stock going up 27% on no news. Link to comment Share on other sites More sharing options...
JEast Posted March 13, 2012 Share Posted March 13, 2012 Not exactly no news. Just completed a presentation at the ROTH growth stock conference. I love this board, but quit talking up my stock :) Cheers JEast Link to comment Share on other sites More sharing options...
fenris Posted March 14, 2012 Share Posted March 14, 2012 Packer, thanks a lot for sharing this idea. Link to comment Share on other sites More sharing options...
rijk Posted April 16, 2012 Share Posted April 16, 2012 packer, another big thank you!!! this is the fastest 100% gainer i have ever owned..... and it looks like it's still cheap!! regards rijk Link to comment Share on other sites More sharing options...
Packer16 Posted April 17, 2012 Author Share Posted April 17, 2012 It has had quite a rise and is up to about 5.5x FCF. The only cheaper and growing radio and TV name that has modest leverage I know of is TVL. Clearly no longer distressed but future rises will be dependent upon delivering future FCF growth. They have a good plan lets see if they can execute. Packer Link to comment Share on other sites More sharing options...
rijk Posted April 17, 2012 Share Posted April 17, 2012 i struggle to see how the leverage could be labeled modest for either salm or tvl but the fcf yields and the potential for that cash flow to reduce debt is really impressive for both companies regards rijk Link to comment Share on other sites More sharing options...
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