EVC - Jumping Back Into Entravision

2023-07-11 12:06:51 ET

Summary

• I have decided to invest in Entravision Communications Corporation, despite previously advising against it, due to its low valuation and strong financial performance.
• Recent financial results show revenue and net income up by 21.2% and 8% respectively, with a 67% increase in the dividend. However, the interest expense has also grown.
• I view recent insider activity, with CFO Christopher Young investing $43,000 in the company in May, as a positive sign for potential investors.

It’s been just shy of four months since I put out my latest article on Entravision Communications Corporation ( EVC ) in an article whose title left little to the imagination: “Still Avoiding Entravision.” Since then, the shares have returned a negative 24.25% return, against a gain of 10.9% for the S&P 500. At some price, even an imperfect company becomes a reasonable investment, so I thought I’d revisit the name once again. If the comments section of my previous article is anything to go off of, this is a wonderful investment. Just because they were collectively wrong in March doesn’t mean that their optimism is wrong today, so it’s worth another look.

I’ll decide whether or not I’m willing to put capital to work based on the latest financial results and by looking at the valuation. I also want to write briefly about some recent insider activity.

We’re all busy people, and for that reason we may not have time to wade through article after article about our favourite stocks. This is especially the case when articles frequently just repeat things we already know. It’s particularly challenging when an article states an opinion with which we disagree, and I do that more often than most. There’s nothing more vexing to a certain type of reader than a stranger on the internet (me, in this case), writing something disagreeable. For these reasons, I put a “thesis statement” paragraph near the beginning of my articles, so you can get in, get the gist, and then flee before things get too cumbersome or disagreeable. You’re welcome. I’ll be buying back into Entravision today. I like the multi-year low valuation. I like the fact that the dividend yield is within spitting distance of the 10-year risk free rate. I like the absolutely rock solid capital structure, and I like the recent financial performance. Finally, I like the fact that an individual who knows this business more than I ever will has recently put some of his own capital to work here. I’ve traded this stock successfully over the years by buying when it was time to buy, and selling when it was time to sell. In my view, today is very much a time to buy. I think a very compelling argument could be made to suggest that this is a “growth” company, trading at “value” prices.

Financial Snapshot

The latest financial results have been rather good in my view, with revenue and net income up by 21.2% and 8% respectively. Dilution has kept the EPS figure flat, but management has rewarded shareholders with a 67% uptick in the dividend. Things look even better when we compare the most recent quarter to the pre-pandemic era. Since 2019, revenue and net income are up an eye watering 270% and 43% respectively. The one fly in the soup from my perspective is the growing interest expense. It’s up about 121% from the same time last year, but only up about 24% from the same time in 2019. Please note that this figure is net of the interest earned on the immense cash hoard. Although I’d love to see a lower debt level, I will admit that there’s little to complain about with this capital structure given the colossal cash hoard.

Given all of the above, I’d be very happy to buy this stock at the right price.

The Stock

If you're one of my regulars for some reason, you know that I consider the stock and the business to be different things. I've written my reasoning so often that I worry about boring my regular readers. Although I may “worry” about it, I don’t care enough to not do it, so here goes. The business generates money by selling advertising and media services, largely to Hispanic communities. The stock, on the other hand, is a slip of virtual paper that gets traded around in the public markets, and the up and down price movements often reflect more about the mood of the capricious crowd than it does anything to do with the stock. The price moves may be related to the changing appetite for “stocks” as an asset class, or changing interest rate policies etc. Additionally, when the crowd does react to what's going on at the firm, it often overreacts, and these overreactions are the source of potential profit, in my view.

Many people dismiss my idea that we need to review the stock separately, because they believe that “we don’t buy stocks, we buy businesses.” Fair enough, I guess, but consider the following: an investor who bought this “business” on June 14th is down 7.2%, while an investor who bought this “business” one week later is up about 8%. Not much changed at the business to warrant a 15% variance in returns over this time. If you want to invest well, it’s really, really important to only buy the stock at the right price.

A word for "right price" is "cheap", which is why I really like buying cheap shares. I measure cheapness in a few ways, ranging from the simple to the more complex. On the simple side, I like to look at the ratio of market price to some measure of economic value like earnings, free cash flow, and the like. I want to see a stock trading at a discount to both the overall market and its own history. In my previous missive on this name, I lamented the fact that the price to sales ratio was about 0.5, and the dividend yield was about 2.3%. Fast forward to the present, and the shares are about 22% cheaper and the yield is now about 48% greater, putting it only about 50 basis points below the 10-year Treasury Note .

Source: YCharts

Source: YCharts

In addition to looking at ratios, I want to look at what the crowd currently expects from the future for a given company. I do this because I want to buy when the crowd's expectations are too dour, and sell when the crowd becomes too rosy. I want to try to quantify these expectations as much as possible, and to do that I turn to the works of Stephen Penman and/or Mauboussin and Rappaport. The former wrote a great book called "Accounting for Value" and the latter pair recently updated their classic "Expectations Investing." All of these writers consider the stock price itself to be a great source of information, and the former in particular helps investors with some of the arithmetic necessary to work out what the market is currently "thinking" about the future of a given business. This involves a bit of high school algebra, where the "g" (growth) variable is isolated in a standard finance formula. Applying this approach to EVC at the moment suggests the market is assuming that earnings growth will be non-existent for the foreseeable future. I think this is a ludicrously pessimistic forecast. Given the above, I’ll be buying some shares this morning.

But Wait, There’s More

With apologies to Orwell, all investors are equal, and some investors are more equal than others. Put another way, some people are just better at this, and so when we have an opportunity to ride their coattails, we’d be wise to take it. For example, some investors have teams of very talented analysts working for them. Some investors are the same people who make laws, and that gives them a bit of an edge. Some people live and breathe the company, and know more than any Wall Street analyst ever could. I’m writing about insiders, obviously. When insiders buy, I tend to pay attention, because in general they know something the outside world might not.

With that in mind, I’d point out that in May of this year, CFO Christopher Young put another $43,000 of his own capital to work purchasing shares . When I’m on the same side of the table as the people who know this business better than anyone, my comfort level rises pretty dramatically. Insider buying of this type is neither necessary, nor sufficient, but it’s a great bit of confirming evidence.

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