Noble Financial Director of Research Michael Kupinski has upgraded the company from market perform to outperform. He believes the stock could go as high as $14.00. In a note to investors this week Kupinski highlighted Cumulus’ restructured debt, and advertiser guarantees as reasons for his upgrade.
However, he also said Cumulus still has too much debt. “While the recent reorganization has substantially lowered the company’s debt levels, we believe that the debt levels are still too high for a company facing secular challenges. Not surprising, though, the company plans to aggressively pare down debt over the coming years to better position its balance sheet, which we believe will support higher stock valuations.”
Kupinski is aware that political comps from 2018 will be tough to overcome and is expecting Cumulus to actually generate 2% less revenue in 2019, compared to 2018. “We are not sanguine about the company’s fundamentals in 2019. The company will have difficult comparisons following the influx of Political advertising in 2018 (over $16 million) and weak listenership levels are sure to have an adverse affect on the company’s agency business. Investments largely behind it. The company is behind the industry in terms of implementing traffic management tools, but appears to be catching up. Such tools will allow the company to better manage its advertising inventory and allow for easier payment.”
Kupinski is a fan of Cumulus’ ability to generate cash and how that will be used. “Free cash flow generation is significant. Despite the anticipated lackluster fundamentals in 2019, we anticipate that the company will generate $94 million in free cash flow in 2019 and roughly $108 million in 2020, which will be earmarked for debt reduction. Every dollar of debt reduction should enhance the equity value assuming the multiple remains constant.”
The analyst also sees Cumulus’ approach to podcasting as a bonus. “The company is taking advantage of shifting listening habits and the strong demand for podcasts. Cumulus has multi-platform promotional power to help listeners solve the discovery issue apparent in today’s podcast space, while assisting content partners to rapidly grow audiences. The revenue growth from podcasts has been significant. From $100,000 generated in 2016, revenue from podcasts in 2018 is expected to exceed $12 million.”
In recent months Cumulus has been offering advertisers a guarantee on their advertising. Kupinski thinks that idea will also help the company prosper. “This is a practice that the radio industry embraced long ago, with limited success. Measurement techniques have improved, however. Importantly, we believe that the EPC Guarantee is a sign that Cumulus is fighting to keep and win back its Radio advertisers.
Overall, Kupinski says he’s taking a sober view of radio’s advertising environment. “Our 2019 and 2020 revenue estimate assumes that core radio advertising will decline in the range of 1% to 3% per year. The company is expected to benefit from growth in its Digital/Podcast business and Political advertising will give the company a boost in 2020. As such, our 2019 revenue estimate is $1.12 billion, down 1.6% from our estimated full year 2018 revenue estimate of $1.13 billion. We anticipate revenue growth in 2020 to be a modest 1.4%, largely reflective the influx of $19.5 million in Political advertising.”
Kupinski expects Cumulus to generate free cash flow of $93.6 million in 2019 and $108.4 million in 2020. “We believe that free cash flow will be earmarked for debt reduction. We anticipate that the company will pursue more aggressive debt reduction strategies, which will include asset sales. Notably, the company has some real estate for sale in Washington D.C. area that it expects to be sold for roughly $75 million. But, we expect that the company will sell radio stations, especially in markets that the company does not have strong market presence or penetration.”
And finally, despite the fact that Cumulus has not really taken a position on more deregulation, Kupinski believes that if the FCC rolled back the rules, that could benefit Cumulus. “We believe that lifting radio ownership rules could allow a heightened M&A environment in the industry and help support and/or expand current cash flow stock valuations. The FCC is expected to update media ownership rules in its Quadrennial Review and may allow broader in-market consolidation, especially in smaller markets. Such a move could support higher cash flow valuations, in our view.”
