Changes in capital structure often tend to present attractive investment opportunities, particularly in small-cap stocks. The need for restructuring usually arises from excessively high debt levels, and the valuations within small caps tend to crash with the rising uncertainty associated with restructuring.
A recent victim of this situation is Cumulus Media Inc. (CMLS, Financial), one of the industry leaders in radio broadcasting, which declared bankruptcy last year due to colossal debt. The company went through a financial restructuring in June 2018 and emerged from Chapter 11 after reducing its debt by more than $1 billion. It is trading at low valuations today and could prove to be a good investment opportunity.
Consistent revenue growth with reducing leverage
Cumulus Media does not have much of a problem with its income statement. The company has always shown healthy revenue growth and decent margins. In its result for the fourth quarter of 2018, it reported reveue of $303.7 million, a 5.21% increase from the corresponding period of 2017, and a $5.48 million increase over analyst estimates. Its earnings per share were about $2.25, which were also higher than Wall Street expectations. The good results were largely driven by excellent digital revenues, which accounted for more than 60% of the top line.
Last year, when it filed for bankruptcy, the value of its assets was below the level of its debt. The situation was so bad that the debt was actually more than 100 times the value of the equity and more than 25 times Ebitda. But it has made a conscious effort to reduce the gearing, divesting six stations to Educational Media Foundation for approximately $25 million and using the money primarily to pay off term loans.
Today, the company's debt is down from $2.33 billion to about $1.23 billion, which is a little over three times the value of Cumulus' equity. With the rising Ebitda and the reduced leverage, the current debt-to-Ebitda ratio of 7.92 seems much more reasonable as compared to the situation in the past. The management might indulge in further divestments of stations to gradually pay off the loans on the balance sheet.
Multi-year deal with DAX
The company recently announced a multi-year deal with DAX, one of the highly advanced digital audio advertising platforms, which works as a third-party sales representative across network radio streaming and national programmatic advertising. DAX brings audio expertise and provides brands with access to data targeting tools to reach key audiences. This collaboration is expected to significantly improve listener engagement and attribution in the digital audio advertising space and also enable advertisers across Cumulus Media’s programming access to attribution technology from DAX.
Investors have taken advantage of low valuations
Cumulus has an operating margin of 13.53%, well above the industry average, and a net margin around 6.02%. Its three-year revenue growth rate is as high as 20%. These fundamental factors may seem to be amazing for a stock that is trading at a price-earnings ratio of hardly 5.75, but the company has gone through a restructuring. Even today, its Altman Z-Score is about 1, which is in the distressed zone.
There is certainly risk associated with the revival of the company, but this has not deterred institutions and gurus from investing. It is worth highlighting that institutional investors and hedge funds own more than 90% of the company’s stock. In terms of guru activity, Michael Price (Trades, Portfolio) started a position in the third quarter of 2018, when the price averaged around $17. This could certainly be perceived as a positive sign.
The stock has gone through some ups and downs in the past six months but has appreciated by about 5%. The company has consistently traded at an enterprise value-revenue multiple between 1.65 to 1.85, which means that if the company keeps up its revenue growth, there is good scope for stock appreciation.
Conclusion
Restructuring has presented a compelling opportunity in the case of Cumulus Media. The stock is trading at very low valuation multiples and has attracted the interest of institutional investors. The uncertainty following the restructuring and the low Altman Z-Score are important factors that should be kept in mind before investing. But, the stock could prove to be an excellent high-risk, high-reward investment for long-term growth investors.
Disclosure: No positions.
