Tightening credit markets and an accelerating industry-wide decline in radio revenue derailed Cumulus Media Inc.'s (CMLS) buyout deal. Nevertheless, we think the company will again seek to go private when the economy and credit markets improve.
The company is currently trading at 9.0x depressed 2008 EBITDA, well below the former buyout multiple of 14x. Although, we don't expect to see to those previous lofty radio buyout multiples again in light of the industry's secular decline, some multiple expansion would be logical when the economy improves.
In the meantime, revenue pacings are ahead of the industry, but the company is burdened with near-industry-high leverage, which in turn will likely slow the current pace of its massive buyback program. Therefore, at this point in radio's cyclical and secular slowdown, we see no near-term catalysts for CMLS shares to outperform the broader market.
Cumulus profitability and earnings growth have outperformed its peers, owing primarily to the company's small market emphasis and to its economies of scale achieved by acquiring stations in its existing markets. Cumulus further bolstered return on equity (ROE) and earnings-per-share (EPS) growth by repurchasing shares as prices weakened partly owing to the secular decline in the radio industry.
However, these buybacks have been partly funded through debt a trend that cannot continue given the company's industry-high leverage levels (net debt/EBITDA is 6.8x) and declining free cash flow. At this juncture, we think Cumulus will use its cash flow to lower debt levels before resuming share buybacks, as it has announced intentions to reduce leverage. At present, the company has net debt of $698.3 million.
Read the full analyst report on CMLS
Get real-time market insights and profitable stock recommendations from the team of analysts at Zacks Equity Research. See all todays Analyst Blog entries on Zacks.com.