Five year summary of PDCO stock price. From 2012 to 2018

Written by:

Noam Ganel is the Managing Director of Pen & Paper, a value-oriented stock research publication. Subscriptions are now available. He also serves as  Vice President in Capital Markets at Silvergate Bank and holds the Chartered Financial Analyst (CFA) credential.

Leave your email address in the box below to receive weekly essays and exclusive content directly to your mailbox.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Did Video Kill the Radio Star?

Why I bought a few BBGI shares

April 14, 2019

“LET’S GET GROOVINNNNN,’’ shouts Didi Harari, a popular Israeli broadcaster.“We have an AMAZINGGG show for YOUUUU. We interviewed Lionel MESSSSIIIII and we have some new, exclusive songs to play. SOOOOOO stay tuned!”

Radio stations in Israel haven’t changed much since I was a teenager. On 88 FM you can still listen to jazz and soft rock. On 103 FM you will only hear songs in Hebrew. And on Israel’s most popular radio station,91.8 FM, all you hear pop, from Ariana Grande and Coldplay to The Idan Raichel Project.

The lack of change in radio listening habits is strange. Mind you, Israel is often referred to as a nation that embraces technology and pioneers innovation. I challenge you to walk around Tel Aviv and find a single person not glued to a digital screen. Spotify opened its services a year ago. Companies, such as Microsoft, Apple and Intel, have opened research and development centers. To paraphrase Watson, it is a quite the peculiar incident that radio stations are thriving in Israel.

 When I was in college, a professor once explained what “OII” is.The three letters represent three words: “Only In Israel.” What he meant by that is there are times when logic fails and only the mystical “OII” can explain. Was radio’s popularity an “OII” phenomena? I pulled a few 10-k reports of publicity traded broadcasting companies to learn more about the  industry.  

The broadcasting industry

The radio business is simple: payments from advertising companies generate revenue for the radio stations. The income formula: number of ads multiplied by the price per ad. That price in return is the number of location stations, the supply and demand and the size of the market. The expenses include payroll and maintenance of the equipment.

Broadcasting rights are the largest asset on the balance sheet of radio companies. Broadcasting rights are the radio station’s exclusive license to broadcast over the radio. These contracts are typically granted for 8 years. And since the U.S. government, through the Federal Communications Commission, heavily regulates the market, there are many rules that radio station must follows. For example, under the ownership rule, in markets with 45 or more radio stations, ownership is limited to 8 commercial radio stations, no more than 5 of which can be either AM or FM.

The stock investment research website, Value Line, provided the following list of radio companies : Saga Communications (SGA on Nasdaq) had a market capitalization of $201 million. Ascent Capital Group (ASCMA on Nasdaq) had a market capitalization of $9 million. Emmis Communications (EMMS on Nasdaq) had a market capitalization of $48 million. Salem Media Group (SALM on Nasdaq) had a market capitalization of $75 million. Townsquare Media (TSQ on Nyse) had a market capitalization of $98 million. And Beasley Broadcasting Group (BBGI on Nasdaq) had a market capitalization of $108 million.  

Beasley Broadcasting Group

Only Beasley caught my attention. Founded in 1961 and located in Naples, Florida, the company’s pre-tax income increased from $3.8 million in 2014 to $29.3 million in 2018, an annual compounded growth of 50%, while the compounded growth in outstanding shares was less than 5%. The ratio between pre-tax income and net tangible assets was adequate, too. Excluding 2014, when the ratio was 3%, the pre tax to net tangible assets ratio ranged from 18% to 15% over the four years.  

Source: Public filings and author's calculations

Beasley, which trades at less than $4 and less than 10 times the cash flow per share, has a few winning radio stations. In Philadelphia, Pennsylvania, it owns WMGK, which is rated second out of the 36 radio stations available in that region. That stations plays classical rock for the most part.

In Boston, Massachusetts, Beasley owns WBZ-FM, ranked second of the available 40 stations where you can listen to sports commentary. In Tampa, Florida, Beasley owns the country music station,WQYK-FM, ranked third of the available 42 stations in that region. And in Fort Myers, Florida, Beasley owns WJPT, which is ranked second of the 25 available stations.

Yet the ownership of Beasley's common stock comes with risks. The first risk is that between June 2019 and April 2022, radio licenses will be renegotiated. This may have an adverse affect. The second risk is that advertising is a discretionary expense. In a downturn, this is one of the line items that companies slash. This will undoubtedly hurt Beasley. The third risk is that Beasley will need to repay $247 million in 2023 and fourth, that the U.S. Congress, in a new ruling reviewed by Congress, may require companies such as Beasley to pay additional royalties to record labels.

 Epilogue

In the “frequently asked questions” section of Galgaltz , Israel’s most popular radio station, a listener asked, “Who needs  traffic reports when I can simply turn on Waze or Google Maps and see the live traffic for myself?”  

Based on market surveys, Galgaltz answers, most listeners simply prefer to hear traffic news over the radio. “This must be the power of radio -it has a medium that builds a community,” it concluded, “and the will of our listeners to feel that the traffic bottleneck they are in is not them only, probably, but the problem of many.” 

I cannot verify whether Galgaltz’s response, that people feel a sense of community by listening to the radio, is true. But I do know that if tomorrow, for any reason, radio stations shut down, there would be a tremendous outcry.

This is because there are many people, both in U.S. and in Israel, without smart phones. According to Pew Reserach Center, 11% don't use the internet. These people cannot access news media and radio serves as a free resource. Also, we are creatures of habit. My parents, while they do own smart phones, listen to the news over the radio. And finally, I agree with Galgaltz that radio does provide a sense of community. This is because, as Rabbi Jonathan Sacks once said, a community is where someone notices if you are gone.