Entravision Communications (EVC) is a Spanish-based global multimedia company that reaches its audience through television, radio, and digital segments. The company owns and operates 55 television stations spread out through California, Connecticut, Florida, Kansas, Massachusetts, Nevada, New Mexico, Texas, and Washington, D.C. The company operates in 19 of the top 50 U.S. Hispanic markets and comprises the largest affiliate group of both Univision television and UniMas networks. Entravision generates revenue from sales of national and local advertising time of television, radio, and digital media platforms. EVC also generates revenues through retransmission consent agreements with multichannel video distributors. The company owns and operates one of the largest groups of predominantly Spanish radio stations in the US. Spanning over 16 US markets and 40+ individual stations.

Entravision is ridiculously cheap while sporting an incredibly high 55% FCF Yield. They have ROIC of 39% with some of the highest profit margins in the industry. For example, EVC touts a near 50% Operating Margin, 32% Net Margin, and 60%+ Gross Margins. The company nearly doubled revenues from 2016 to 2017, achieving $500M+ with $173M net income. Debt levels have fallen since their 2013 high, and cash is inching closer to matching total debt. Amidst all of this, Entravision is statistically one of the cheapest investments in the Global Broadcasting Industry, trading at 1.86x EV/EBIT and 1.91 Price/FCF. With high free cash flow generation, the company will continue to pay down debt, increase their competitive advantage through industry leading margins, and reinvest back into their business through share repurchases and dividends (currently a 4% yield).

Hispanic American population growth offers a growing market potential ($1.3 trillion) with long runways in place. Since 2000, Latinos have accounted for over half of the United States population, and, Latin Americans are younger than the general addressable market (median age 28 compared to 37). Couple that with EVC’s new affiliation agreement with Univision that runs until 2026 and you get a company with competitive advantages and high barriers to entry within the local Hispanic American communities.

Business Description & Strategy

The company operates radio and television affiliate stations specifically for Latinos in the United States, Mexico, and various Latin American locations. Entravision has nearly 95% of their stations through Univision and UniMas. Their network affiliation agreement with Univision and UniMas provides exclusive rights to broadcast Univision’s networks in their markets. Along with radio and television operations, the company provides digital advertising solutions which allow customers to reach targeted online Hispanic audiences worldwide, which EVC owns. The company is executing on its strategy of being the leading radio, television, and digital medium for Hispanic households. EVC owns and operates properties in 14 of the 20 highest density U.S. Hispanic markets, as well as 10 of the top 15 fastest-growing markets. How does the company plan on continuing its pure-play dominance of the Latino customer base?

Drivers of Growth

First and foremost is the U.S. Hispanic population growth. Hispanic American are now the largest minority group in the United States with more than 57 million living inside the borders. The projected growth of the Hispanic American population is an astounding eight times the national average population growth rate. This means that by 2022, Hispanic Americans will represent 22% of the US population, over 70 million. Because of this, use of the Spanish language will grow exponentially. Currently around 78% of Hispanics over the age of five speak Spanish, while close to 65% of U.S. Hispanics are bilingual.

A second major reason for future growth is increased purchasing power in the Hispanic American community. Hispanic Americans accounted for $815B in consumer expenditures in 2017. According to Geoscape, Hispanic Americans are expected to average $57,000 in median household income. This averaged household income would imply $1.2 trillion in consumer expenditures by 2022. This increased consumer spending from the Hispanic community creates an attractive profile for advertisers. Since the Latin American population is both younger (on average) and growing faster than the national average. US Hispanic Americans spend more than non-Hispanic communities across the board: spend 8% more on food & beverage, 38% more on restaurants, 55% more on children’s clothing, 41% more on footwear, 31% more on soaps, and 19% more on cellular phone services.

Business Segments Dive

Television: Leading Driver of Consistent Revenues

Univision is EVC’s primary network programming which is directed towards a young, family oriented audience. Standard programming usually begins with morning shows, local and national news in the afternoons, and specials / primetime shows at night. The weekend schedule starts with children’s cartoons, followed by sports, reality, and comedy shows / movies in the evenings. One differentiating characteristic of Hispanic shows is the inclusion of novelas. Think of novelas as the Hispanic version of soap operas. Soap operas are highly watched by non-Hispanic Americans, and Univision claims that novelas are a better version of soap operas. Novelas have a beginning, a middle, and an end; which stretches out over a five-day week. The show captures a broader audience than its English counterpart, spanning men as well as women (whereas in the US it’s almost strictly women that watch soap operas).

Tagging along Univision, EVC affiliates with UniMas network, the 24-hour general-interest little brother of Univision. UniMas offers sports (mostly boxing and soccer), movies (both English and Non-English), as well as popular novelas (both new and reruns). Think of UniMas a combination of ESPN, FX, and ABC Entertainment around noon.

Finally, the company offers local news programming. This local news is what separates EVC and its affiliates from its competition, creating high switching costs for its viewers. EVC’s early local news is ranked first or second for competing local newscasts regardless of language in 13 of the company’s 20 main markets. The company has poured capital into their local news stations, investing in both equipment and people to create a one-stop-shop for Hispanic Americans. In most households, Univision local news is the only significant source of Spanish-speaking daily news.

I want to stress the importance of this fact because it plays a vital role in understanding the competitive advantage of a company like EVC. Stepping outside of the business deep dive for a minute, ask yourself this question: When’s the last time you fully switched what channel you watch your local news? Thinking about this myself (even for someone who barely watches TV) I don’t think I’ve ever switched stations. If I want local news, I go to my local channel, for me its Fox 5. There are numerous news stations where I live and I have a smorgezborg of choices, but I almost exclusively choose Fox 5. Most of this refusal to switch comes from familiarity, it’s what my parents watched when I was growing up. Now, diving back into the application this has to the value of EVC, how much more is that familiarity for Hispanic Americans? In most markets, Univision local news is the only source of Spanish-speaking local news. That’s a bond stronger than simply choosing between Fox 5 or CBS Channel 9. The conclusion: switching costs are high. It may not be a fiscal switching cost, but its a switch from what is most familiar, and sometimes that harder for people to do than a fiscal switch.

Revenue Within Television

Close to 65% of revenue generated from EVC’s TV operations came from its spectrum usage rights in 2017, 28% from local and national advertising, and 8% from retransmission consent revenue. Taking out the spectrum rights revenues, the company averages roughly $230 – $250M in TV revenues. Let’s break each down to understand it a bit clearer.

Spectrum Rights are agreements with TV stations in which EVC sells the rights to utilize any excess spectrum for the broadcast of a third party’s multicast networks. In other words, think of it like being paid to give someone else your rollover minutes from your cellphone plan. EVC charges a fee to accommodate the operations of these third parties, such as moving channel positions, accepting interference with broadcasting, as well as modifying or giving up spectrum use rights altogether. These revenues have been lumpy ever since EVC started selling those rights. For instance, revenue from spectrum rights was $0 for 2013 & 2014. 2015 generated $10M in revenues, with 2016 coming back in at $0. 2017 was the biggest year for the company in terms of spectrum usage rights revenue, boasting $264M in total revenue.

Local and National Advertising accounted for a total of 28% of revenues, or ~$150M in 2017. Revenue is generated from advertising time sold to advertisers or agencies. Univision acts as the sales representative for EVC and negotiates advertising times with national companies such as Charter Communications, Nissan Motor, Toyota Motor, Ford, Cox, Fiat Chrysler, and McDonald’s. On the local scale, revenues are generated through the sale of advertising to local small businesses. EVC uses its own internal sales team to negotiate advertising contracts with small businesses. When looking within Advertising, Local generated 15% of revenues compared to 13% for national advertising.

Retransmission Consent revenue accounted for 8% of remaining revenues, or around $31M in 2017. Retransmission revenue simply means the company receives payments from Multichannel Video Programming Distributors (MPVD’s for short) for access to EVCs television station signals in order to rebroadcast the company’s signals to charge their subscribers a fee for the programming. In other words, MVPDs pay Univision for the right to broadcast Univision on their station, so that they can then charge their customers a fee for the ability to view Univision. This payment is in the form of either a per subscriber fee or a share of the retransmission revenue these third-party MPVD’s generate. The company has proxy agreements that last until 2021 in markets such as Orlando, Tampa, and Washington D.C. (subject to renewals at the end of 2021), and agreements that last until 2026 in markets like Albuquerque, Boston, and Denver. The company believes retransmission revenue will be important in adding incremental top-line revenue growth over the next 3 – 5 years, and is a low-cost way at achieving higher incremental margins. It makes sense, you don’t have to put any additional capital into your operations to generate revenue from retransmission fees or shares, you’re simply allowing others to use your content that they pay you for; very low operating expense.

Competition

The company’s major (and only true pure-play) competition is Telemundo, now owned by Comcast. Telemundo is the second-largest provider of Spanish-speaking content globally. The company is able to distribute content across multiple platforms and avenues such as original productions, cinematic motion pictures, news, and sporting events. Although Telemundo is a force to be wreckond with, Univision believes they simply have the better product. Univision’s primary network is the most-watched Spanish speaking network in the US during primetime hours for Hispanic households.

Coupled with strong overall ratings, the company excels in local markets, ranking first or second regardless of language in 13 of their markets among 18-49yr and first or second in 11 markets for 18 – 34yr. Like I mentioned earlier, most people don’t switch where they get their local news. As long as Univision continues to invest in talent and equipment, they should stay first or second for years to come.

Radio: Reaching Audiences Far & Wide

The company owns 49 radio stations, 46 of those stations are placed in the top 50 Hispanic markets and utilizes Entravision Solutions as their national sales rep division. EVC’s radio stations reach around 20 million Hispanic American households which averages out to 40% of the total Hispanic population in the US, that’s a wide reach! Radio programming follows the normal routine: local advertising, news, traffic, promos, and weather. The company produces music through two radio networks: La Tricolor and La Suavecita. 

La Tricolor targets male Hispanic Americans 18 – 49 and features a morning drive show, afternoon drive show, evening comedy based routines, and of course Mexican regional music. La Tricolor airs on 17 of the company’s stations.

La Suavecita is another Mexican music network targeting Hispanic women aged 25 – 49 as well as general Hispanic adult population aged 25 – 54. This network airs on 17 stations and includes morning shows, mid day / afternoon shows, as well as Evenings with Mayra to cap the night.

Along with both of these music networks, the company syndicates NFL games in Spanish (Sunday Night Football & AFC Playoffs) for 28 of their stations. Finally, the company offers what they call “Alternative programming” as a way to differentiate themselves in local markets. For example, in their El Paso market, they run “The Fox”, which is an English-speaking program for classic rock and pop music from the 1960s – 1980s; in Orlando they run “Salsa 98.1”, a Spanish-speaking salsa, merengue, and bachata program targeting Hispanics between 25 – 54. EVC tries to hit all bases and fill all avenues for household capture by offering a wide variety of programs.

Radio Revenues: Local & National Advertising

The radio segment of EVC’s business generates nearly all of their revenues from local and national advertising. On the local front, revenue is generated through time sold to advertisers or agencies of advertisers. These sales of time slots are generally to small, local businesses, and the company employs their own internal sales force in each of their respective markets in order to capture those contracts. Local advertising accounted for 65% of total radio revenue for 2017. National revenues are collected in the same manner as local revenues, the only difference being EVC employs their Entravision Solutions division to act as the national sales rep for their Spanish-language exclusive stations. National advertising picked up the remaining 35% of total revenues.

According to Nielsen Audio, advertising rates have historically been lower for Spanish radio stations than English-speaking counterparts. This trend is shifting and the gap is shrinking as the Hispanic population increases faster than non-Hispanics. Couple that with the fact that Hispanic Americans spend more on items such as food and beverage than non-Hispanics, it presents a larger opportunity for advertisers in those industries to enhance their own sales.

Competition for Air Waves

The company faces stiff competition mainly from other sources of media, especially digital. Since advertisers are always looking for the most effective way of deploying marketing capital, digital avenues are offering cheaper and better avenues at connecting with potential buyers. Radio could be thought of as an equivalent to what newspapers are to online content. Digital radio such as iHeartRadio is slowly eating away at the competitive advantages of traditional radio.

Luckily the company generates around 12.5% of total revenues from radio, and in fact, their digital segment of their business is growing fast and will likely overtake radio revenues in the next year or two assuming its digital business keeps its current pace of “start-up” like growth.

Digital Segment: Fastest Growing Segment of Business

Entravision provides digital advertising solutions which allow advertising agencies and companies to reach audiences located in Spain, Mexico, Argentina, and other Latin American countries. The company developed proprietary technology and data analytics platforms that specifically allow advertisers to reach customers across a wide array of digital avenues while providing premium, targeted ads.

How EVC Differentiates its Tech

The company combines its suite of solutions that include Headway Digital, Mobrain Mobile Advertising Platform, and Pulpo Media Advertising Network. Customers of EVC’s digital platform buy-in and stay with EVC because it allows them to gain insights into the performance of their advertising campaigns, manage those campaigns, and find ways to maximize ROI for a specific niche market, the Hispanic American consumer. The company highlights five key benefits to its service:

1. Delivers Premium Content: EVC professionally produces premium advertising content that its customers can deploy in their targeted ad campaigns. The company owns and operates digital media sites as well as partnering with publisher partners.
2. Scale & Reach Across Many Devices: With EVC’s digital platform, its customers have a one-stop-shop to display their ads across smartphones, laptops, and tablets, all from one location.
3. Variety of Advertising Types: The company offers various types of ads for its digital customers from videos ads to display banners.
4. Brand Safety: EVC has a fail-safe in place to make sure that all of its proprietary ads don’t appear on “sketchy” sites like sites with obscene language, violence, or pornography.

Revenue Generation & Customers

Advertisers buy advertising through the digital platform which is sold and managed in-house by the company’s sales force. These “managed campaigns” offer customers a white glove approach to online advertising where EVC walks the customer through each step of the way. The company is paid per the number of viewer impressions, from this, the company pays out a percentage of revenue to its publishers.

EVC has a diversified portfolio of clients, and at the end of 2017 had a little over 3,600 paying customers on their digital platform. Their customers encompass multiple industries from healthcare to travel to finance and media. No individual company represented more than 5% of digital revenue growth. Digital revenue growth exploded in 2017 over 140% to $57M. For perspective, the company generated $18M in revenues from digital advertising in 2015. The growth of EVC’s digital business is impressive to say the least. Normalizing for spectrum rights sales, EVC’s digital business went from 1.0% of revenues in 2010 to over 20% in 2017 spanning 12 countries. This growth should sustain over the next 3-5 years as US Total Media spending patterns suggest roughly $170B by 2022, a stark increase from its $108B figure in 2018. By 2022, digital mediums will compromise over 60% of advertising dollars spent.

Competition

EVC has tremendous competition within digital advertising, specifically from the mega-corporations like Facebook and Google. The bet the company is making is on its pure-play Hispanic American tilt. Through its layered approach to digital advertising, the company believes it is well positioned to capture the niche Hispanic American market that still has tremendous catalysts in place for growth.

Company Tailwinds

The company hasn’t been in this good of financial health in a long time, perhaps ever. Taking a look at the balance sheet we see nearly $250M in cash, bringing their Net Leverage ratio to more or less 1x. This leverage ratio makes for one of the healthiest balance sheets in their industry. Global Broadcast TV has an industry average Current Ratio of 1.52. Compare that with EVC’s current ratio of 5.60 and you can see the tremendous financial flexibility the company will have during an eventual economic downturn. The increased cash can in part be credited to the diligent cost cutting that is going on within the company. Over the last year EVC managed to reduce its annual expenditures by nearly $8M, all of which helped increase margins and incremental bottom line EBIT.

2018 Midterms = Revenue Boost

Midterm elections (and general elections) should provide consistent upticks in revenues and free cash flow during their time. In the 2014 midterms the company generated around $9.3M of additional revenue. In their latest slide deck, EVC management expects this $9.3M figure to be an appropriate benchmark for future midterms and general election seasons. Obviously these additional revenues are lumpy, but it provides incremental revenues which gives the company more flexibility to either pay down debt, buyback shares, or invest back into the business through technology innovation.

Hidden Assets: $300M in NOL & Max Capacity in DC

EVC has federal and state net operating loss carryforwards of around $316M and $222M it can use to offset future taxable income. According to the 10-K, the federal NOL’s will expire during 2020 – 2033 with state NOL’s expiring 2018 – 2033. The company will expire $0.7M in state NOL in 2018. These NOL’s provide EVC a sustainable way at reducing their tax burden, furthering increasing their margins and profits, at least until 2020-ish.

Another asset that isn’t easily recognizable on the balance sheet is the company’s capacity in the Washington, D.C. market. During a FCC auction for broadcast spectrum rights, the company acquired rights to utilize its spectrum rights in the Washington, D.C. market for around $32.6M. In doing so, the company moved their TV station from Hagerstown, MD to Washington, D.C. On the balance sheet, this transaction was treated as an asset acquisition, but it’s found deep in the 10-K, and you had to read it.

Back of Envelope Valuation

I like figuring out potential scenarios, different models in which the company could end up. I bucket these scenarios into three options: Expansion, Steady State, and Cash Burning (or some variation of those names). I like knowing what a fair range should be given a dire business outlook, it helps me better understand my complete margin of safety. I am hesitant of those that value companies based on wild assumptions and expectations, yet fail to project business failure, and its impact on share price five years from now if the business fails to grow.

This matters in every valuation, but especially for a company like EVC that experienced abnormal revenue growth for 2017 through spectrum rights usage. Normalizing the revenue growth trajectory going forward paints a more realistic picture on what could potentially happen. Let’s start with the bad.

Value Destruction: -5% CAGR Revenue Growth & Inflated Cost of Sales

The company averages around 40% cost of sales to their revenues for the last five years, making their gross margins around 55-60%. Taking out the ridiculous revenue growth period in 2017, the company has been around 3-5% revenue growth CAGR. In this example, we’re going to assume zero contributions from spectrum rights revenues (which we’ve noted tend to be lumpy in nature). We are also going to assume a -5% CAGR revenue growth rate, citing the inability of the company to negotiate TV affiliate extensions, as well as a failure to capture the growth of the Hispanic American market.

After reducing revenues by 5% per year, we arrive at 2022 revenues of $240M. Now, we’re also going to assume that the company isn’t as fiscally responsible as they once were and now spend more to generate revenues. Instead of the 40% figure for cost of sales, we’re going to use 55%, which then puts our gross margins at 45%. After accounting $75M towards GSA expenses, we’re left with $33.42M in Operating Income. After subtracting our interest expense on the debt, we’re left with $23M in EBIT, or a 10% EBIT Margin.

In this scenario, we get an average price per share range of $2.60 – $4.16 based on 10x, 13x, and 16x EV/EBIT multiples (15x is the industry average). Closer to industry average you’re looking at close to 20% downside from current trading prices given negative revenue growth and increased cost of sales. 

Steady State: No Growth in Top-Line Revenues

Assuming that the company generates roughly $290M in revenue for 2018 (in line with projections), and fails to grow revenues for the next five years, we get close to $160M in gross profit (55% margins). After deducting GSA expenses which average to around 25% of total revenues, we arrive at operating income of $90M. Subtracting our interest expense of $27M we get EBIT of $63M. Using EBIT multiples between 10x – 16x, we get a fair value range of $7.00 – $11.30 per share, or a potential upside of 38% – 121%. This is assuming no revenue growth, no spectrum rights lumpy revenues, and steady state cost controls.

Expansion: Modest Growth & Improved Cost Structure

Our final scenario takes into consideration a modest 3.5% CAGR revenue growth rate, for a 2022 top-line revenue figure of $332M. Next, we’re going to assume that management is cutting costs and reducing their interest expense due to generation of spectrum rights usage revenue, still coming in the form of lumpy payments, but better than nothing. Interest expense falls to around 15% of operating income, and cost of sales reduces to 40% of revenues. This gives us 60% gross margins and $124M in operating income. Taking out our interest expense we’re left with $105M in EBIT, for a 32% EBIT margin. This isn’t completely irrational as the company has experienced both a 49% EBIT margin and a 25% EBIT margin in 2017 and 2015 respectively. Remember, this is a “best case” scenario. I’m not expecting this situation to play out, but it’s important to get that upper bound on what could possibly be achieved if the company executes exceptionally well. If we apply an industry average of EV/EBIT between that 10x – 16x range, we get a per share price between $11.50 – $18.84, representing upside range of 130% – 269%.

Where Is My Fallibility?

Entravision is in the best financial shape its been over the last five years. It’s doing the right thing, and it’s allocating capital effectively while reaping the benefits of lumpy (but substantial) spectrum rights revenues. However, here are a few reasons (not an exhaustive list) on how the long case for EVC could backfire:

1. The company fails to re-negotiate tv rights and loses market share to its top competitor Telemundo in major markets.

Right now EVC is the market leader in the majority of its markets compared to Telemundo. If the company fails to keep its TV rights and local dominance amongst Hispanic Americans, it could lose important market share, driving advertisers away from Univision and towards other stations, predictably Telemundo. Large markets such as Orlando, Washington, D.C., and California will be hot-spots for keeping Hispanic American market dominance.

2. Leverage Rises as Company Raises Debt Levels

Net leverage ratio is right around 1x given the company’s historically high cash levels due to record level revenues from 2017. Historically the company has operated around 4.5x Net Debt / EBITDA and it doesn’t have to get to that level of leverage for the company to remain successful. With subsequent levels of increased revenues from elections and spectrum rights, the company should have enough cash not to exceed 2x leverage. The company currently pays around 8% – 10% on interest expense for their debt. In a rising interest cost environment, increasing leverage would hamper the company’s ability to expand margins and generate free cash flow.

Also, the company has around $300M in NOL’s that it’s using to tax shield its income. If the company fails to utilize these NOL’s by the end of 2018, a normal tax rate would incur of 23%.

3. Slow to No Growth Industry Wide

The Global Multimedia industry isn’t poised for rapid growth, in fact, growth is barely there. TV advertising is expected to grow a mere 1.3% CAGR till 2022, radio 1.9% CAGR growth, and out-of-home advertising 3.9%. Because of this slow growth, it makes cost cutting extremely important, and leverage control critical. Investing in an industry with low future growth prospects isn’t sexy, and if a company cannot sustain even the average growth rates for the industry of 1%, it could send share prices falling fast.

4. Industry Consolidation

Entravision isn’t the biggest player in its industry. Although its the market leader, Telemundo, owned by Comcast, has a lot more cash at its disposal, and if the market keeps consolidating, Telemundo could have a greater advantage in rolling up the industry underneath it, grabbing more market share. That being said, EVC makes for a compelling acquisition itself, so in this scenario, it might not be the worst outcome.

Wrapping It Up

Recent cost cutting, influxes of revenues from lumpy business segments, a beautiful balance sheet, and hidden assets present an interesting opportunity to invest in a pure-play media company positioned to capture the tremendous growth within the Hispanic – American dynamic. 55% free cash flow yields, nearly 40% ROIC, leading industry margins, and the company trades for a mere 2x FCF and 2x EV/EBIT. Now, these multiples are skewed due to the tremendous year the company had in 2017, but normalizing for Free Cash Flow and EBIT still puts the company at a discount to its peers.

If one values businesses on an enterprise level, here’s what you’re getting: a stable revenue generating TV advertising business segment, a slowly declining radio segment that still generates profits, a fast growing digital business segment that will likely reach 30% of total revenues by 2020 and some lumpy spectrum rights revenues as a cherry on top. With a clean balance sheet and debt in check, prices appear cheap at current levels, and I would love for shares to fall closer to $4 than $5 before I buy in on my paper account.

DISCLAIMER