Entravision Communications: There is a path to higher prices, but patience is key (EVC)

In recent years, traditional media groups have increasingly digitized their businesses. In the case of Entravision Communications Corporation (NYSE: EVC), a partial “de-digitalization” is taking place. Anyone who is vaguely familiar with the Some may know the company as a leading owner/operator of Spanish-language television and radio stations in the United States, but in recent years Entravision has been primarily a digital advertising company.

But as I'm looking for Alphas Kingdom Capital mentioned in previous coverage of EVC that a major client loss led to EVC divesting and winding down the lion's share of its digital advertising operations. This has led to a partial recovery in EVC after it fell sharply on the news of the client loss.

There is still a large gap between the trading price of EVC and the underlying value, but it may take some time to close it. Based on recent developments, management appears to be in no rush to sell digital media assets that are not impacted by subscriber loss. There could be a factor limiting Entravision's ability to pursue strategic alternatives. Still, an investment in EVC could ultimately pay off for patient investors who get in at today's prices. Here's how.

Current earnings and current management strategy

On March 5 Meta Platforms, Inc. (META) announced plans to shut down its authorized distributor program by July. Given the huge impact this would have on EVC's digital ad business, shares experienced a massive price decline, falling from just over $3.50 per share to as low as $1.33 per share.

However, the stock has since partially recovered as management reacted quickly to this significant change in its business. Entravision has sold several of its key international digital advertising assets, including its digital platform representation business.

As shown in EVC's latest quarterly results (released August 8), the company is incurring large one-time losses from the sale/winddown of its international digital advertising segment. Although total revenue increased 12% year-over-year thanks to election-year advertising spend, Entravision reported a net loss of $31.68 million for the quarter ending June 30, 2024, a big jump from the roughly $2 million net loss in the year-ago quarter.

As widely expected, the results had little impact on EVC's share price. Given the recent corporate information from management, EVC's fluctuating performance since the results were released is understandable.

In the earnings call, EVC CEO Michael Christenson discussed the company's plans to maximize political revenue from its television and radio businesses, primarily by expanding the networks' news coverage.

Christenson also explained how the company plans to continue investing in the growth of its programmatic advertising subsidiaries Smadex and mobile advertising Adwake.

Now, in and of itself, that's not a bad plan, but it's questionable whether these efforts will significantly improve EVC's financial performance or stock price in the near future. Maximizing political revenue will boost results this year, but what about after the 2024 election cycle ends?

Even if Smadex and Adwake continue to grow, could it go unnoticed as investors continue to view EVC as a broadcast stock? For shares to make big jumps, more aggressive moves like selling assets might be necessary.

Class U shares could limit takeover attractiveness

As Kingdom Capital also discussed in its EVC stock report earlier this year, the death of Walter Ulloa, the company's founder, marked the end of Entravision as a controlled company.

But despite no longer having a controlling shareholder, Entravision may not be a top takeover target among broadcast companies. EVC's Class U common stock would likely make an outright sale of the company or its core broadcast assets difficult. The Class U shares, all of which are owned by TelevisionUnivisionwhich owns the Spanish-language television networks with which most of Entravision's television stations are affiliated, have limited voting rights.

They represent only 10% of EVC's total equity. If TelevisaUnivision sells or transfers the shares, they will automatically be converted into Class A shares. However, as long as they are outstanding, Entravision cannot sell itself or enter into a merger, nor can it sell its subsidiaries Univision and UniMás without the consent of TelevisaUnivision.

In theory, EVC could afford to buy back and cancel the shares, which are worth about $17.4 million at current prices. Given that these shares may represent a “trump card” for TelevisaUnivision against its largest group of partners, it is questionable whether the company would be willing to sell, even at a premium.

How EVC could ultimately pay off

Strategic and/or financial buyers may not be quick to snap up Entravision, but that doesn't mean EVC stock will remain a value trap. Selling the TV stations could prove difficult, but Entravision could still sell other assets.

Just because EVC's leadership is currently more interested in growing what's left of its digital advertising business than selling it doesn't mean a potential sale is completely off the table.

In fact, it may prove wiser to take time to continue to grow the business and sell it. If the economy's long-awaited “soft landing” comes to fruition, trends in digital advertising demand could remain favorable next year. In turn, acquisition interest from strategic buyers could also increase.

Even now, that business is still quite valuable. Last quarter, what's left of Entravision's digital business generated about $41.1 million in revenue. CFO Mark Boelke noted on the conference call that this segment now has positive operating margins and further revenue growth is expected this quarter.

Taking into account manufacturing costs as well as direct operating and selling and administrative expenses, the segment’s EBITDA amounted to approximately USD 3.86 million. Annualized, this results in EBITDA in the range of USD 15 million. Even with an EBITDA multiple in line with competitors at the lower end of the valuation range, such as Criteo SA (CRTO), which trades at an EV/EBITDA ratio of around 10.9, Entravision's digital businesses could be worth around $163.5 million to a strategic buyer.

A possible second windfall

If Entravision's digital segment continues to grow, a potential purchase price could exceed this amount. The proceeds from a sale could provide EVC with a windfall gain equivalent to the windfall gain from the sale of some of its broadcast spectrum assets in 2017.

Compared to EVC's current valuation of $167.4 million, a future nine-figure windfall could have a bigger impact than the past windfall. Instead of using the money to go on a merger and acquisition spree (as happened last time, with mixed results), EVC's management could find more shareholder-friendly ways to deploy that money.

For example, Entravision could use the money to pay down its $237.7 million in debt. The company could use it to fund a special dividend or resume large share buybacks. Although EVC has aggressively bought back shares in recent years, buyback activity has slowed recently.

Other catalysts and risks

The above-mentioned potential future catalyst for EVC comes in addition to other existing catalysts that could help push the price of this severely undervalued stock back up.

In particular, the possibility of Entravision being able to sell more of its spectrum. This catalyst may be many years away from (potentially) coming to fruition, but it is still worth mentioning.

In addition to the catalysts, there are of course many risks associated with investing in EVC stock. The digital advertising business may be growing rapidly right now, but what happens if the long-awaited economic “soft landing” doesn't happen? Growth could come to an abrupt halt.

In turn, potential interest in acquiring Smadex and/or Adwake could fizzle out. A downturn would also be a bad sign for the broadcast segment. In addition to macro risks, another potential downside risk is that Entravision decides to cut or eliminate its quarterly dividend of 5 cents per share. At current prices, this gives the stock a juicy double-digit annual dividend yield of 10.75%.

Even if the share price is valued as if the dividend could be reduced or eliminated altogether in the future, there is a high probability that such a elimination would put downward pressure on the shares, at least in the short term.

Conclusion

The impact of Meta Platforms' revenue loss may now be overcome, but a lack of major news could lead to continued mediocre share price performance for Entravision Communications.

Although it may take some time, the investment could ultimately pay off. In a few years, Entravision could monetize the still-thriving parts of its digital advertising business, unlocking value for investors in the process.

Such a “winning moment” could even come soon if shareholder activism occurs in this stock. While the Class U shares could complicate interest from a strategic buyer, it may not have much impact on an activist's efforts.

An activist fund could take a position, gain influence and/or board seats, and push to prioritize other tasks than management's current plans. Whether or not EVC stock becomes an activist target, shares are worth considering at current prices for value investors with a long-term investment horizon.