We are initiating a Hold Trade rating on Townsquare as our more positive near-term fundamental views are offset in the near-term by the potential impact of the coronavirus. (Report link and model link).
The terrestrial radio business has been facing secular challenges with likely LSD declines in core advertising in recent years driven by listenership declines. However, we think Townsquare is differentiated from peers because of the markets that it serves and its high-quality digital solutions.
We believe Townsquare offers a strong portfolio of digital products to small advertisers that typically don’t have access to the services of an ad agency. And, because it is in smaller markets, it is generally competing with smaller media operators that don’t have the resources to build out these offerings.
The structural attractiveness of Townsquare’s portfolio is reflected its relatively strong revenue growth outlook. Our current estimates – which do not include the impact of the coronavirus – suggest that Townsquare can grow revenues by ~5% through 2022 as its digital offerings more than offset LSD declines in core terrestrial radio. Overall margins should remain relatively flat as margins from these businesses are comparable to the core radio business.
However, this positive outlook is not reflected in Townsquare’s valuation as the stock is trading around the middle of the terrestrial radio pack. It’s also trading in-line with its average over the past year and post-IPO average, despite the traction it has been getting with its digital segments and progress on delevering.
Our Hold rating reflects the current uncertainty around the coronavirus, which is likely to have an impact on the US economy and advertising, TSQ’s primary source of revenue. However, as the impact of the coronavirus fades, we see an opportunity in TSQ shares. We see an $11-12 fair value based on our pre-coronavirus estimates. The driver of the upside over the next six to twelve months is the company’s digital initiatives powering revenue and EBITDA growth, aiding in delevering.
We do see significant longer-term concerns about the sustainability of the overall radio business given the uncertain place of radio in the connected car. Car listenership accounts for ~50% of total TSL. Like many traditional media companies in the 20th century, radio benefited from a relatively scarcity of distribution options. This barrier to entry has been eroded by the internet and mobile technologies. It’s also commoditized much of the content offered by radio.
Over time, we think growth in connected cars poses significant existential threats to traditional radio as we struggle to see radio’s place in the connected car. However, we suspect this threat will play out over a longer-time horizon as initial adoption of connected cars will likely occur in higher income demographics, where Sirius is already entrenched. With an average age for cars of almost 12 years, we think radio’s middle and lower-middle class demographic base will likely be slower to adopt connected cars.
Over time, we think growth in connected cars poses significant existential threats to traditional radio as we struggle to see radio’s place in the connected car. However, we suspect this threat will play out over a longer-time horizon as initial adoption of connected cars will likely occur in higher income demographics, where Sirius is already entrenched. With an average age for cars of almost 12 years, we think radio’s middle and lower-middle class demographic base will likely be slower to adopt connected cars.
Originally published on 03/02/20.
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