From Up Above

A Bird’s Eye View on Beasley Broadcasting Group

Published on:
July 14, 2019
Last Update:

Written by

Noam Ganel is the voice behind Pen & Paper, a value-oriented stock research publication. He  serves as  Vice President in Capital Markets at Silvergate Bank and holds the Chartered Analyst Credential (CFA).

Revenue

Beasley is in advertisement. That is to say, advertisers pay the company to broadcast their ads. So the simple math to generate revenue is the number of advertisements times the price Beasley charges the ad companies. The trends are positive

In 2018 the company reported on $257.5 million in revenue compared to $58.7 million in 2014. Pre-tax income increased to $29.3 million from $3.8 million during this five-year period. Over the past decade, the company did not report any losses. The lowest earnings per share was in 2009 at 15 cents per share. The highest earnings per share were in 2017 at $3.14 per share but over $2 of that was related to a one-time charge related to the U.S. tax code.

Expenses

Beasley burns about 80% of its revenue before it pays lenders. Of the reported revenue of $257.5 million in 2018, $45.3 million was left to service the debt obligations of about $16 million.

The ratio between gross operating income and interest expense was 2.8 times in 2018 and 2.20 times in 2017. It is a thin margin.

The annual capital expenditures expense was $4.2 million over the past two years and about half of that over prior three years. After capital expenditures expense, Beasley reported positive net cash flow in each of the past five years.

BBGI earnings over past decade

Assets

Broadcasting rights are 80% of the tangible assets. These contracts are typically negotiated every eight years. They are renewed if Beasley operates within acceptable practices as deemed by the FCC.

Net tangible assets, defined as total assets less intangible assets less total liabilities, were $246.8 million or $8.96 per share in 2018. So at $3 per share, the stock trades at about two-thirds discount to net tangible assets.

Liabilities

To finance the acquisition of radio stations, Beasley borrows money. And as the company’s appetite for acquisition increases, so does its leverage ratio, which increased from about 25% to 35% over the past few years.

The current $252 million in term loan will mature on November 1, 2023. The company is paying interest based on Libor index plus an interest rate spread, which amounts to 6.5%.

And as any borrower soon realizes, borrowing someone else’s money comes with conditions. It is no different here. Beasley’s lender, U.S. Bank, limits the amount of leverage the company can take and monitors its dividends policy. Not necessarily a bad thing.  

BBGI's balance sheet

Stock biography

Over the past 10 years, the stock traded hands as low as $1 in 2009 and as high as $18 in 2017. The 10-year average range in earnings multiple was between 7 and 20 times the earnings per share.

While management grew the pre-tax income by over 50% compounded annually, it did not dilute shareholders to do so. Beasley had 22.9 million outstanding common shares in 2014 and $27.5 million in 2018, a compounded dilution of less than 5%.

This behavior, of increasing pre-tax earnings while the number of outstanding shares is invariably the same, is because management is heavily invested in the company. The Beasley family owns 59.4% of the outstanding shares.

George Beasley Inducted into the Pennsylvania Association of Broadcasters Radio Hall of Fame
This year George Beasley was inducted into the Pennsylvania's Radio Hall of Fame

Peer Group Comparison

I sifted through the operating performance of five competitors: Saga Communications (SGA on Nasdaq), Ascent Capital (ASCMA on OTC), Emmis Communications (EMMS on Nasdaq), Salem Media Group (SALM on Nasdaq) and Townsquare Media (TSQ on Nyse.)

Key findings: ASCMA and EMMS ratio of total liabilities to net tangible assets was 1.28 times and 2.03 times respectively. Beasley’s ratio was 0.65.

Both ASCMA and EMMS reported losses last year.

The pre-tax income to net tangible assets ratio was 10% and 13% for SALM and SGA compared to Beasley that averaged between 18% and 15% over the past 5 years.    

Most comparable company to Beasley is SGA. It has a lower leverage ratio of 41% and reported on 13% ratio of pre-tax income to net tangible assets. Its profit margin is higher than Beasley at 14% compared to 10%. Yet it is an expensive stock. Its pre-tax income per share - $2.8 - was valued at 12 times (the stock trades at $34). Beasley pre-tax income was $1.06 and it trades hands at about $3.

Risks

Investors in Beasley (yours truly owns shares) should be wary of five risks. First, between the period June 2019 and April 2022, as the company will renegotiate its broadcasting licenses, the stock price is likely to be volatile.

Second, advertising is considered a discretionary expense. Read: at times of downturn, revenue will decline. Third, the company has a balloon payment due in November 2023.

Fourth, Boston, MA, Philadelphia, PA and Tampa, FL serve 60% of the company’s revenue, making Beasley highly dependent on the wellbeing of these markets. Fifth, to partner with the Beasley stock is to have a leap of faith in the Beasley family.

Thesis

Readers of this blog know that I only buy stocks that I expect to double in price. If I am right, then within five years, the expected return is 15%. If I am right within three years, the expected return is 25%. This range is my ultimate desired rate of return in Beasley. (If within 2 or 3 years my thesis is wrong, I typically sell the stock.)

I am uncertain why Mr. Market is bearish on Beasley. I also could not understand why the stock price halved over the past year. I will leave that discussion to others.

My investment thesis is that Beasley is a well-managed company, with shareholder-friendly management that sells a service that I can reasonably estimate its future cash flow.