Without any particular reason, Urban One, Inc. (UONE) delivered, in May and June, triple digit returns. The media company, which is focused on African-American markets, is also receiving a lot of attention over the internet. Given these facts, I decided to conduct some research. I expect UONE to deliver a 2020 EBITDA of $100-$140 million, which makes an EBITDA multiple of more than 10x and Net Debt/EBITDA of 6x-9x. Given these figures, I would expect conservative individuals to stay away from the stock. Don’t get me wrong. Perhaps, investors can make money by buying now and selling in a few months. I don’t talk about stock trading in my blog; in fact, I assess investment thesis. In this case, I would not expect the EV/EBITDA to be at the same level for many years.
Urban One, Inc. runs a multi-media business model, which targets African-American consumers. The company owns and operates a significant amount of broadcast stations at more than 14 locations in some of the most populous African-American markets.
From all my research, it is clear that UONE is an expert in local and national advertising. Most of the company’s revenue comes from advertising. With that, many years ago, the company commenced to diversify its revenue stream by buying and selling the company’s radio stations, and other media properties. Among the different business interests, I would highlight TV One, LLC, Interactive One, LLC, and Reach Media, Inc., which own the rights of some well-known shows and brands that are listed here:
– Cassius and Bossip
– Radio One
I cannot go through all the brands, entertainment websites, and events. However, I suggest the readers to visit the company’s site. There is plenty of information about the brands, radio stations, and media properties.
Very recently, I became very interested in UONE since the amount of interest for the company’s business model spiked up. I cannot really explain why people commenced searching extensively the company’s website and the company’s name. I wonder why African-American audiences became a hot topic over the internet. In any case, according to Google Trends, many people are interested in the company’s name; Urban One.
In theory, a small company like UONE does not really receive a lot of interest from the market. As a result, the liquidity of UONE’s stock is not significant, which drives the valuation of the company down. Unfortunately, that’s usually the case. However, when there is a liquidity event, the amount of business awareness can increase. As a consequence, the amount of demand spikes up that leads to an increase in valuation. If you share my thoughts, now take a look at UONE’s stock chart. In the last week, volume, market capitalization and price spiked up.
Recent Share Price Volatility And One Shareholder Sold Shares
I did some due diligence and could not explain the recent increase in the share price. The share price spiked up from $3 to more than $38 in a few days. The massive share price appreciation represents triple digit stock returns.
In the most recent days, there is only news about one shareholder, who sold 3,938,161 shares. In my experience, when one shareholder sells shares, the market does not celebrate it by pushing the share price up. Don’t get me wrong. I have to congrat investors, who made impressive stock returns. However, I could not identify any information to justify the most recent share price spike.
Profit And Loss Account And Cash Flow
UONE reports stable net revenue and solid operating income. 2019 sales were equal to $436 million, 0.6% less than that in 2018. With that, the operating income in 2019 was $87 million, 19% more than that in 2018. I have to remark that the D&A was equal to $16 million and $33 million in 2019 and 2018 respectively. Besides, the impairment of long-lived assets was also larger in 2018 than that in 2019. If we take into account these items, I believe that the operating income is almost the same in 2018 and 2019.
In my view, investors will be more interested in learning the company’s EBITDA, which is a better indicator of economic performance than the operating income. 2019 EBITDA was equal to $133 million, and 2018 EBITDA resulted in $140 million. Taking into account UONE’s EBITDA in the past, I would be expecting a 2020 EBITDA of $100-$140 million because advertising may decline if the economic recession hits the United States.
The 2020 EBITDA figure of $100-$140 million is, in my opinion, quite conservative. In the three months ended March 31, 2020, sales declined by only 3.6% due to a decline in radio advertising, digital advertising, and cable and television affiliate fees. The image below offers more information. Note that political advertising increased quite a bit because of the elections in the United States. In 2020, I would expect an increase in political advertising in 2020:
With an asset/liability ratio of 1.16x and $65 million in cash, UONE’s financial situation appears healthy. Certain financial experts will also appreciate the goodwill reported worth $233 million. The company acquired several businesses in the past and expects synergies. In the near future, they may enhance EBITDA. With respect to the valuation of the broadcasting licences, as of March 31, 2020, they are worth $535 million, 43% of the total amount of assets. I do believe that the licenses are worth that much because of the previous price paid by UONE in several acquisitions of licences. I will show my calculations later in the article.
Without any doubt, UONE’s debt may not be appreciated by the market. As of March 31, 2020, the long term debt and long-term lease liabilities are worth $910 million. In my opinion, the market is pushing down the valuation of UONE because of the financial risk created by the debt.
Risks From The Equity Structure
Apart from the total amount of debt, which I believe is a significant risk, UONE is a controlled entity. It means that the company may not have an independent Board Of Directors. Besides, compensation of the company’s executive officers may not be supervised by a group of independent directors. Minority shareholders will not celebrate these features. In addition, in my opinion, the lack of an independent Board of Directors will most likely make the market push the total valuation of UONE down.
“Further, we are a “controlled company” under rules governing the listing of our securities on the NASDAQ Stock Market because more than 50% of our voting power is held by our Chairperson and the CEO. Therefore, we are not subject to NASDAQ Stock Market listing rules that would otherwise require us to have: (i) a majority of independent directors on the board; (ii) a compensation committee composed solely of independent directors; (iii) a nominating committee composed solely of independent directors; (iv) compensation of our executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors; and (v) director nominees selected, or recommended for the board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors.” Source: 10-k
The Valuation Of The Radio Stations
In 2019, the company sold one radio station for $13.5 million. On August 8, 2018, the company sold another radio station for $12.7 million. Given these figures, I believe that the value of each radio station is worth approximately $13 million:
“On August 31, 2019, the Company closed on its previously announced sale of assets of its Detroit, Michigan radio station, WDMK-FM and three translators W228CJ, W252BX, and W260CB for approximately $13.5 million.” Source: 10-k
“On August 8, 2018, the Company closed on a sale of the assets of one of its Detroit, Michigan, radio stations, WPZR-FM (102.7 FM), to Educational Media Foundation, of California, for total consideration of approximately $12.7 million, of which approximately $12.2 million was received in cash. ” Source: 10-k
In December 2019, the company reported in its annual report that it had 60 radio stations. If we assume a price of $13 million per radio station, the value of the company’s radio stations is equal to approximately $780 million.
Each radio station may be very different. The company has FM, AM, and HD stations, and they target different populations. Thus, investors will need to understand that $780 million is an approximate valuation. With that, in the balance sheet, only the radio broadcasting licenses are worth $535 million, so I do believe that $780 million may be close to the real value of the company’s portfolio of radio stations. Remember that the company sells each station with property and equipment. Each station is worth more than the value of the license.
I researched the last annual report to check the share count. The sum of all the share classes is equal to 45.56 million. If we assume a share price of $10-$30, the market capitalization is equal to $455-$1300 million.
If we add debt of $910 million, the enterprise value is equal to $1.3-$2.2 billion. If we take into account my 2020 EBITDA figure of $100-$140 million, the market appears to be giving a lot of credibility to UONE. Other companies with Net Debt/EBITDA of 6x-9x may not trade at more than 10x 2020 EBITDA.
I don’t say that the market is wrong. I am an individual investor, and I cannot foresee all case scenarios. Perhaps, the increase in business awareness, by seeing Google trends, may make sales increase in 2020. It would not be the first time. With that, in my view, very conservative individuals and investors without expertise in the media industry will pass on this one.
Delivering triple digit stock returns in less than one month, UONE appears to be quite popular among retail investors. Many investment blogs and finance forums, which I could consult, talk about the massive stock returns obtained. Having mentioned this fact, I want to be cautious about the stock. The total amount of debt is significant, and the company’s EBITDA is not enough to justify the current share price. Some traders may make money by buying cheap and selling high. However, I need to remark once again for long term investors that the company’s financials are not good enough to justify a total valuation of $1.4-$1.6 billion.
PDF Version : My Take About UONE’s Triple Digit Stock Returns
Disclosure: I don’t hold shares and I was not compensated for the article.
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