EVC - Entravision May Have Strong Short-Term Upside In A Market Turnaround

2023-09-29 05:49:27 ET

Summary

• Entravision's stock has pulled back significantly in recent months due to ongoing headwinds in the ad industry as well as lackluster earnings.
• Entravision Communications Corporation has been expanding its digital footprint and making strategic acquisitions & partnerships to solidify its position in the media industry.
• The company's localized approach and tailored advertising solutions make it an attractive platform for businesses targeting niche markets.
• A hefty dividend makes the stock a fair name to hold while waiting out what would be an expected turnaround.

A Turnaround In EVC Would Unlock Strong Upside Value

We last covered Entravision Communications Corporation's (EVC) stock back at the end of 2022. Since then, the stock has pushed upward to new 52-week highs around $7.30 and back down to 52-week lows near $3.50. This volatility from the leading multimedia company has been driven by a string of bad earnings misses and overall macroeconomic headwinds. Investing in Entravision's stock now represents an opportunity to tap into a dynamic media market (Figure 1) with a unique demographic niche at a discounted price. We will now explore the compelling reasons why considering an investment in Entravision Communications Corporation may be a wise decision if the company can turn things around.

Figure 1. EVC highlights geographical growth, but creative thinking may be beneficial to increase profits in a struggling industry with ad spending down

Entravision Communications Corporation has been making significant strides in the ever-evolving media landscape despite lagging profitability. Recent news developments suggest that the company is actively positioning itself for growth and innovation:

1. Digital Expansion: Entravision has been expanding its digital footprint ( Figure 1 ), recognizing the increasing importance of digital media. The company's digital assets, including websites and mobile apps, have seen growth in traffic and engagement. This shift towards digital aligns with broader industry trends.

2. Strategic Partnerships & Expansion: Entravision has strategically sought out assets that complement its existing portfolio. These expansions and partnerships have allowed the company to broaden its reach and diversify its revenue streams, further solidifying its position in the media industry.

3. Adaptive Marketing Solutions: Entravision has been developing innovative marketing solutions in the ad tech industry (Figure 1) that cater to the changing needs of advertisers. By offering tailored advertising solutions, the company remains an attractive choice for businesses looking to connect with consumers effectively.

4. Newfound Value: EVC trades at a forward price to earnings below 10x earnings and a forward price to sales ratio below 0.3x earnings offering value if they can stop the downward trend in earnings that has incurred of late.

These recent developments along with their history highlight Entravision's commitment to growth and adaptation within the media sector, positioning it as a dynamic player in a continually evolving industry. Risks are present as television ad based markets face scrutiny in a world shifting towards streaming and subscription based services. Therefore, we maintain a buy rating on Entravision below $3.5 and a hold rating above that price point with a price target of $5 we believe very well could hit within the next year.

Current Valuation

Assessing the valuation of Entravision Communications Corporation involves considering various financial metrics, industry dynamics, and growth prospects. First and foremost looking towards price to earnings ratio, Entravision's price-to-earnings (P/E) ratio is within a reasonably valued range (17.4x), but is higher than industry average (Figure 2) as profitability has taken a hit due to reduced ad spending in tougher macroeconomic conditions.

Figure 2. EVC trades towards the higher end of the spectrum in comparison to peers likely due to struggling earnings and strong revenue growth

Revenue growth has been a standout for the company over the last year and is expected to continue with forward estimates predicting around 14% growth over the next year, giving reason to that premium valuation. The media industry, particularly in serving diverse and underserved communities like the Latino population in the U.S., has been showing promise. Entravision's focus on this demographic niche positions and new niche demographics should prove to be a beneficial strategy for growth going forward. The company's efforts to expand its digital presence align with the broader shift towards digital media consumption as well. This diversification of platforms may enhance its revenue potential and attractiveness if profits can be realigned.

A return to profitability will likely come as EVC should emerge from these headwinds within the next year. With that comes potential for upside with earnings margins expansion and the potential to again trade near historical averages in the $4.5-$5.5 range making Entravision a strong hold or a decent buy on any further pullback. For the time being investors can enjoy a hefty 5.6% dividend along with the potential for upside.

Risks

Investing in Entravision Communications Corporation's stock, like any investment, involves certain risks that should be carefully considered. Most recently apparent is the macro headwinds the company has been facing. The media industry can be subject to rapid changes in consumer preferences, technological advancements, and economic fluctuations. These factors can and have impacted Entravision's financial performance. If inflation and rising interest rates drags out as is now looking more and more likely, expect Entravision's underperformance too as well due to their dependence on fluctuating ad revenue.

The media landscape is highly competitive as well, with both traditional and digital media outlets vying for audience attention and advertising dollars. Entravision must continuously innovate and adapt to maintain its competitive edge. They have done well with this geographically by finding their niche and will need to continue to do so to keep up growth and sustain premium valuations.

EVC does have a decent amount of debt ( Figure 3 ) at over $260 million, but is bolstered by a strong cash balance over $100 million as well. While Entravision is expanding its digital presence, the transition to digital media comes with its challenges, including changes in monetization strategies and competition from digital-native platforms as well as upfront investments to gain eyes so these cash and debt balances should be monitored going forward.

Figure 3. EVC's debt is a significant part of their enterprise value

Conclusion

In conclusion, Entravision Communications Corporation, EVC, represents an intriguing investment opportunity for those looking to capitalize on the dynamic and evolving media landscape, particularly in serving the communities around the world. Their geographical and digital breadth offers strong growth opportunities if the overall ad landscape can shift back into more favorable conditions. Look for more potential pullback to open up buying opportunities to take advantage of holding along the way and collecting a nice dividend during the group's likely turnaround.

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