Description

TSQ is currently my highest conviction idea. Eremita beat me to it and did a great job writing up the co. here a couple months ago. Please check out that writeup. I have a somewhat different take on the thesis (I’m less focused on radio acquisitions and more excited about the segments outside of the core local advertising segment), and also wanted to address some of the lingering concerns, and so I thought it worthy of a new posting. I’ll try to be brief and focus on the most additive and differentiated aspects.

Before I do that, here’s the punchline:  I expect TSQ to earn ~$2.25 of FCF and ~$1.50 of (fully taxed) earnings in 2016. That’s about a 6x P / FCF multiple based on yesterday’s close. Leverage is currently high at 5.6x (PF for a recent refinancing) but has a good chance of falling to under 4x by the end of 2016, as strong FCF is used to bring down debt. So, picture us talking at the end of 2016 about a company with sub-4x leverage, that has just generated >$2 of FCF, is still growing, and has posted 6 quarters of earnings results that validate both the defensibility of the local terrestrial radio business as well as shown the promise of the live events and media segments. I think a high-teens or $20 share price is well within reason. Ok, onto the content…

First, on management: I think the CEO Steven Price is an extremely high quality manager and the type of CEO that you want to give your money to. Back in the 1990’s, together with his father, Price built and sold Pricellular, a cellular phone operator that focused on rural markets and operated in a decentralized fashion, very similar to how TSQ runs today (as an interesting aside, and drawing another parallel to radio, many people thought the cellular phone business was past its prime when Price Senior became involved). How’d it turn out? The company went public at $4.60 in 1994 and was sold for $14 in 1998 ($1.4 bn EV), providing shareholders a superb return. This may all appear to be ancient history, but I believe management’s track record of success is relevant to the stock today. Other members of the management team also have very impressive and relevant backgrounds, though I won’t mention them here.

Now, as far as management incentives: Management owns 5% of the stock, but that’s not all. Based on my read, in addition to the 1.3 mm shares owned outright, they are entitled to more than 5x that amount via 6.9 mm options, which are struck at the IPO price of $11 (not terribly dilutive as of yet given the current $13.37 share price). I believe Price himself has somewhere north of $30 mm of stock exposure, including the options. And again, I think he’s in this to win. This is a true case of investing alongside owner-operators.

Ok, but doesn’t a bad industry trump a good management? (here comes my defense of local radio…):

First, keep in mind that radio isn’t just music: A quarter of TSQ’s radio stations are AM (mainly talk) and the FM stations are also content focused, and cater to the local audiences. I use TSQ’s “RadioPup” app (and encourage you guys to download and try it) – one station had an entire (recurring) morning program centered around the local fishing conditions. There’s also a lot of political talk content, and local bickering. Hopefully this paints a qualitative picture as to why TSQ’s radio stations are defensively positioned.

As far as adding some numbers… we know that listenership has stayed largely stable for a long period of time (again, see eremita’s write-up). We also know that the research companies (Nielson, Bia / Kelsey) predict steady, albeit modest, continued growth for radio. I thought it’d also be useful to list the latest quarter of radio revenue growth of the peer companies: Entravision was +9.4%, Entercom +0.2%, Saga was -0.4%, iheart +4%, Salem +0.5%, Emmis +0.8% and TSQ was +0.1% or +2.8% if you adjust for political and weather. Amidst a not-great retail environment, most all of the co’s are still posting positive advertising growth, which I personally view positively (although I suppose some could disagree with my interpretation). Trends in 2Q were largely reported to be looking better. Also, many of the stations commented that they outperformed the broader radio market. I think this too is an interesting point – in all but 20 of TSQ’s 66 markets, the company does not encounter competition from Top-5 radio players. This provides a real opportunity to gain share from “mom & pops” and further insulate the company from any weakness in radio. On the most recent call, TSQ stated they indeed believe they are gaining share. For more on the merits of radio, you can google “Bob Pittman Radio” or check out the comments of Andrew Robertson (advertising agency BBDO’s CEO) who recently said “there are still huge, huge radio audiences -- and frankly, it is a massively underutilized medium.” Ok, hopefully I’ve convinced some of you of the merits of local radio properties but enough about that.

More points of differentiation: How TSQ is different from the other radio companies

So, why choose TSQ and not the other radio companies? Firstly, I believe TSQ has the best management. Secondly, it has as pure or purer a focus on small, and local markets. Third, unlike some of the other companies, TSQ can get to a reasonable leverage position by the end of next year. The strong FCF-to-equity yields of the radio (and broadcast) industry become less relevant if the debt can’t be paid down – TSQ has the ability to do this (and also has termed out maturities to 2023 for their outstanding bonds). But beyond all that, a main area of differentiation I’d like to highlight, is that I believe TSQ’s non-radio businesses are real gems in their own right, not just a supplementary business to the local advertising business. I believe both the Live Events business and the Other Media segment will deliver further strong revenue growth and margin expansion. In fact, I don’t believe the company’s growth story is dependent on further radio acquisitions at all over the next couple of years.

Other Media Segment Upside:  For background, recall that there are two businesses within this segment, local marketing services (build your website) and national digital properties such as tasteofcountry.com and popcrush. It might surprise some readers that TSQ’s national digital properties (depending on the month) are among the top 50 most visited multi-platform digital properties in the country (as measured by unique visitors), just a few spots below the New York Times digital site. Together, the TSQ sites had 68 mm monthly uniques in May 2015.

I believe the revenue and margin potential of this segment is materially higher than current results (direct profit margin was just 5% in 2014). Townsquare Interactive (website and local marketing services) has only just broke even and Townsquare Media (the national websites) lost money last year but is expected to turn a profit this upcoming year and is ‘at a very early stage’ with regard to monetization, according to the company. Translating the page views into revenue is tricky to say the least (please message me if you have expertise here) but based on my research, the ‘Townsquare Media’ business alone may have >$30 mm of revenue power, which is more than the entire segment (including ‘Townsquare Interactive’) posted in 2014. While still not a critical component to my 2 year forecast (I assume direct profit in this segment increases from $1.6 to $4.6 mm), I believe there is room for further upside well beyond those estimates.

Live Events Segment Upside: With a 2014 direct margin of ~16%, I believe the Events business will track upwards towards a 20% margin over the next couple of years while becoming 40% larger by revenue (including organic growth and announced acquisitions). Note that most of the live events are not music focused (no talent to pay) and can often be arranged with sponsors contributing to the setup costs (again leveraging the local radio advertising base). Also, events become more profitable as they recur (e.g., first year music events are almost never profitable) and so as TSQ’s new events “season over time” and the company takes full control of their acquired properties, you can certainly expect margins to improve. There’s also a lot of synergy to be reaped as the company syndicates local events into new markets – e.g., the material for the ‘Insane Inflatables 5K’ is packed up and driven around the country to the various host locations creating additional revenue from the same fixed supply cost. Lastly, ticket pricing is currently extremely affordable and can either be expected to increase each year or to remain low to drive further attendance growth. Further evidencing that this segment is far from an afterthought, TSQ co-founder Dhruv Prasad runs this business directly, and while the company doesn’t disclose the return hurdles, it’s run with a ‘private equity mentality’. Here’s a couple interesting interviews to give you a better sense of this business: http://goo.gl/fa4rb6 and http://goo.gl/OmZQfE .

To sum up the above two paragraphs, both the Other Media Segment and Live Events segment are multi-year growth stories with untapped monetization opportunities.

Other upside

Latent monetization opportunities within local advertising: TSQ’s radio stations are currently in an investment phase where the company is spending money on content and copy while cutting down on advertising time to deliver a better value proposition to advertisers and to increase listenership and share (as discussed earlier). While it is uncertain how long this will continue, TSQ’s local ad segment could reasonably be considered as “underearning” currently. I expect this to reverse in future periods, when the benefit of the current spending will also shine through.

Political: While minor to the overall story, political will also provide a benefit to the 2016 numbers. While management downplays the impact, 2012 featured $10 mm of political revenue which may grow nicely as the 2016 race heats up. This will provide a nice YoY bump that I don’t believe analysts fully capture.

Conclusion

I hope this provides some additional perspective on the company and the investment merits. I think today’s low valuation represents a very attractive entry point to invest in a company run by successful owner-operators that are highly driven to create long-term shareholder value.

* I look forward to responding to any comments / questions but apologize in advance as I may be a day or two late in doing so.

** Note that the $2.25 of 2016 FCF is benefitted by some elevated political revenue in 2016. Normalizing for this revenue (which occurs every couple of years but especially in the presidential year) FCF may be ~$0.07 lower. Also note that FCF conversion is currently high because the company will not become a material cash tax payer until 2019. However, there may be subsequent opportunities to further delay / minimize taxes through eventual acquisitions and resultant non-cash amortization charges.

Catalyst

Eventual increased clarity on 2016 numbers (including continued solid performance in local advertising and monetization of the other segments).

Debt paydown should allow for a larger investor base.

Eventual improvements in trading liquidity could also drive the stock (there is a small float)