Should we be surprised, given the close down of the economy due to Covid-19? We all knew business would cut back on advertising - which is Entercom's primary source of revenue.

We wrote up Entercom Communications Corp. (NYSE:ETM) as we were purchasing shares when we saw the share price dropping due to CoronaVirus. We felt the drop was magnified by:

  • the company reporting large losses (even though they were due to non-cash items and cash flow had been strong)
  • debt levels that were going to scare the market, till the company could prove it can successfully navigate the market fallout from CoronaVirus.

But it is worth reading through the report from Moody's when deciding to buy, sell or hold Entercom $ETM

The Entercom Business

Entercom is the second largest radio broadcaster in the US with leading market positions in 22 of the top 25 markets. The company benefits from a geographically diversified footprint with strong market clusters in most of the areas it operates which enhances its competitive position. The geographically diversified footprint may support performance if some markets are able to open in the near term even as other markets remain largely closed due to the coronavirus.

CoronaVirus Impact on Entercom

The radio industry sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment.
The radio industry is also being negatively affected by the shift of advertising dollars to digital mobile and social media as well as heightened competition for listeners from a number of digital music providers. Secular pressures and the cyclical nature of radio advertising demand have the potential to exert substantial pressure on EBITDA performance over time.
Entercom's credit profile have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Entercom remains vulnerable to the outbreak continuing to spread.

Leverage Ratio

relatively high leverage level of 5.3x (as of Q4 2019)
projection that leverage levels will increase substantially in the near term due to the impact of the coronavirus outbreak on the economy.

Liquidity

adequate liquidity supported by a cash position of approximately $180 million as of March 25, 2020 and a largely fully drawn $250 million revolver. Approximately $227.3 million of the revolver will mature in August 2024, and about $22.7 million of the revolver will mature in November 2022.

Covenants

Entercom may need to amend its credit agreement to relax the covenant ratio if conditions in the industry remain challenging. Moody's projects Entercom will be able to obtain an amendment if needed. The term loan is covenant lite.

Positive Signs for the future

diversified format offering of music, news, and sports as well as live events and digital growth initiatives are also positives to the credit profile.
Political advertising revenue is projected to support results as the election approaches towards the end of 2020.
Recent acquisitions to expand its podcasting business and heightened interest from national advertisers are expected to contribute to growth once the impact of the coronavirus subsides.

Conclusion

While we could exit our position at a profit right now, we believe Entercom will survive CoronaVirus. If correct, we believe the stock still has a lot of upside post Covid. For those reasons we are going to continue to hold our investment in Entercom $ETM for now.