EVC - Entravision Communications: Set To Win Election Year Political Advertising Boom

2024-01-14 01:24:39 ET

Summary

• Entravision Communications Corp is a major player in the U.S. Latino media market further diversified with a global presence.
• The company is expected to benefit from increased political advertising spending ahead of the 2024 election cycle.`.
• We believe the stock is well-positioned to rally higher.

Entravision Communications Corporation ( EVC ) offers advertising media solutions across an extensive platform of television, radio, and digital properties with a presence in 40 countries. The company is recognized in the United States with a focus on Spanish-speaking households as the largest "Univision" affiliate group, controlling 49 local TV stations.

Despite solid growth in recent years, the stock has been under pressure facing a reset of earnings expectations amid the shifting ad market and higher costs on the production side of the business. That said, we see an opportunity for a rebound considering what is now an attractive valuation supported by overall solid fundamentals.

Entravision Political Media Spending Catalyst

The setup here is that core U.S. media operations are set to capture a boom in political advertising spending ahead of the 2024 election cycle. Reports suggest local to national campaign spending is set to climb by more than 30% from the 2020 election with traditional media including TV capturing more than 70% of these outlays.

What makes Entravision interesting in this discussion is its particular leadership in Hispanic media , reaching more than 11 million households with local morning and evening news broadcasts.

Data suggests that Spanish-speaking households are a growing force within the electorate, and political campaigns are taking notice, diverting more resources to target these potential voters who may not be exposed to English-speaking channels.

Entravision already had a record year for political-based revenue during the 2022 mid-cycle election, which exceeded the previous 2020 Presidential election year result that contributed 8% of total net revenue. The expectation here is for another record as a key focus point for the company in its business strategy this year.

Solid Fundamentals

Beyond the political ad spending cycle which we view as a near-term growth driver, our take is that EVC has a solid business with a good level of diversification across operating segments and geographic exposure.

The bulk of revenues are related to the digital ad tech connecting brands to major social media platforms and online streaming services. This area has driven strong growth, particularly in emerging markets with a presence in Southeast Asia, Europe, and Latin America. There is also the "audio" segment covering both traditional radio station broadcasts and emerging digital networks.

Entravision last reported its Q3 results back in November 2023, with EPS of $0.03 while revenue of $274.4 million climbed by 14% y/y. To explain some of the stock price weakness since late 2021, top-line growth has moderated from the pandemic era record while higher costs have pressured margins.

The bigger point is that EVC remains profitable with a positive underlying growth outlook. A net leverage ratio of 1.1x at the end of Q3 between $129 million in cash against $211 in total debt highlights a strong balance sheet.

Considering adjusted EBITDA of $77.9 million over the last twelve months through Q3 2023, EVC is trading at an EV to EBITDA multiple of around 7x. While management is not providing formal financial targets, the expectation is that earnings will rebound through 2024 through a strategy to improve operating performance while capitalizing on the political advertising surge.

EVC Stock Price Forecast

We rate EVC as a buy with a bullish case that the trends ultimately progress stronger than expected. On the upside, we see room for a rally to target the $6.50 share price, a level EVC last traded at in Q2 last year, also implying a forward P/E multiple of 22x on the current 2024 consensus EPS of $0.30.

The way we see it playing out is that the upcoming Q4 earnings release expected in early March will provide an opportunity for management to offer strong guidance for the year ahead that can help build sentiment toward the outlook.

In terms of risks, the company remains exposed to broader macro risks. Renewed financial market volatility or signs economic growth is slowing, not only in the U.S. but also internationally, would pressure ad tech spending and likely open the door for a deeper selloff in the stock.

Final Thoughts

Entravision Communications is an interesting small-cap that deserves to be on more investor's radar. While the stock price has been volatile in recent years, the long-term outlook remains positive setting up shares to again deliver strong returns going forward.

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