Tag: Digital

Monday, October 16, 2023

Michael Kupinski, Director of Research, Noble Capital Markets, Inc.

Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.

Refer to the bottom of the report for important disclosures

Overview: A new small-cap cycle? Small cap stocks have underperformed the large cap stocks for the past several years. Notably, there is a sizable valuation disparity between the two classes, one of the largest in over 20 years. Some of the small cap stocks we follow trade at a modest 2 times Enterprise Value to EBITDA, compared with large cap valuations as high as 13 to 15 times. Are we on a cusp of a small cap cycle? 

Digital Media & Technology: Stocks Outperform – But Don’t Get Too Excited. Each of Noble’s Internet and Digital Media Indices, which are market cap weighted, outperformed the S&P 500 in the third quarter, but the double-digit gains from the previous quarter moderated significantly. Despite these relatively positive results, the prevailing theme within each sector was that the largest cap stocks performed the best, while smaller cap stocks across a variety of sectors struggled.

Television Broadcasting: Advertising Stabilizing?As we look toward the third quarter, local advertising appears to be weakening as the economy appears to be slowing. But, national appears to be improving. In addition, while it was assumed that Political would increase in the fourth quarter due to the run-off of the Republican presidential candidates, we believe that President Biden has recently stepped-up advertising in the third quarter, particularly in Hispanic communities.

Radio Broadcasting: Shoring up balance sheets. As many radio companies face a challenged revenue environment and at the same time invested in faster growth digital revenue, some companies have been caught carrying a substantial amount of debt. In this report, we highlight one company that was able to shore up its balance sheet through asset sales. 

Publishing:Stocks outperform. It may be hard to imagine for some investors, but the Publishing stocks outperformed in both the latest quarter and for the trailing 12 months the S&P 500! But, there is still a wide valuation gap between most of Publishers and the shares of The New York Times, with the NYT shares at 15 times cash flow and the rest near 5.  

Overview

The case for small caps

Small cap investors have gone through a rough period. For the past several years, investors have anticipated an economic downturn. With these concerns, investors turned toward “safe haven” large cap stocks, which typically have the ability to weather the economic headwinds and have enough trading volume should investors need to exit the position. Since 2018, small cap stocks have underperformed the general stock market, with annualized returns of just 3.7% as measured by the S&P 600 Small Cap Index versus the general market of 10.2% as measured by the S&P 500 Index. Another small cap index, the Russell 2000, increased a more modest 2.9% annually over the comparable period. The S&P 500 is larger cap, with the minimum market cap of $14.6 billion. The S&P 600 is smaller cap, a range of $850 million to $3.7 billion, with the Russell 2000 median market cap $950 million. Some of the even smaller cap stocks, those between $100 million to $850 million, have significantly underperformed the S&P 600. This is the first time that small caps underperformed a bullish period for all stocks since the 1940s. Notably, there is a sizable valuation disparity between the two classes, large and small cap, one of the largest in over 20 years.

Some of the small cap stocks we follow trade at a modest 2 times Enterprise Value to EBITDA, compared with large cap valuations as high as 13 to 15 times. By another measure, small cap stocks may be the only class trading below historic 25 year average to the median Enterprise Value to EBIT. Why the large valuation disparity? We believe that there is higher risk in the small cap stocks, especially given that some companies may not be cash flow positive, have capital needs, or have limited share float. But, investors seem to have thrown the baby out with the bathwater. While those small cap stocks are on the more speculative end of the scale, many small cap stocks are growing revenues and cash flow, have capable balance sheets, and/or are cash flow positive. For attractive emerging growth companies, the trading activity will resolve itself over time. Some market strategists suggest that small cap stocks trade at the most undervalued in the market, as much as a 30% to 40% discount to fair value. 

Are we on a cusp of a small cap cycle? Some fund managers think so. Such a cycle could last 10 years or longer. In this report, we highlight a few of our small cap favorites in the Media sector, those include companies that have attractive growth characteristics, some with or without an improving economy, capable balance sheets, and limited capital needs. Our current favorites based on growth opportunity and stock valuation include: Direct Digital (DRCT), Entravision (EVC), E.W. Scripps (SSP), Gray Television (GTN), and Townsquare Media (TSQ). 

Source: Morningstar and Noble Capital Markets Estimates. For more information; https://www.morningstar.com/markets/fading-recession-fears-cheap-valuations-have-small-cap-stocks-looking-attractive

Digital Media & Technology

Stocks Outperform – But Don’t Get Too Excited

After increasing by 8% in the second quarter of 2023, the S&P 500 was unable to hold onto those gains in the third quarter. The S&P Index decreased by 3.6% in the third quarter, a decline which we attribute to the market revising its interest rate expectations to one in which rates would remain “higher for longer”.  Large cap stocks that weighed on the broad market index included tech stocks such as Apple (AAPL: -12%), Microsoft (MSFT: -7%) and Tesla (TSLA:  -4%).  Despite this small step backwards, the S&P 500 Index increased by 20% through the first nine months of the year. 

Each of Noble’s Internet and Digital Media Indices, which are market cap weighted, outperformed the S&P 500 in the third quarter, but the double-digit gains from the previous quarter (2Q 2023) moderated significantly. Digital Media 3-Month Performance Sectors that outperformed the S&P 500’s 4% decrease include Noble’s Digital Media Index (+6%), Social Media Index (+4%), Gaming Index (+3%), Ad Tech Index (+1%) and MarTech Index (-3%).  Despite these relatively positive results, the prevailing theme within each sector was that the largest cap stocks performed the best while smaller cap stocks across a variety of sectors struggled.

Figure #1 Digital Media 3-Month Performance

Source: Capital IQ

Perhaps more importantly, each of Noble’s Internet and Digital Media Indices have outperformed the S&P 500 over the latest twelve months as illustrated in Figure #2 Digital Versus S&P 500 LTM. The S&P 500 Index has increased by 20% over the last year (through 9/30/2023), which trailed the performance of the each of Noble’s Internet and Digital Media Indices, as shown in Figure #3 Digital Media LTM Performance.  

Figure #2 Digital Versus S&P 500 LTM

Figure #3 Digital Media LTM Performance

Source: Capital IQ

Alphabet Powers Digital Media Index Higher Despite Broader-Based Sector Weakness

The best performing index during the quarter was the Noble’s Digital Media Index, but the sector’s “strong” performance is deceiving. Shares of Alphabet (a.k.a. Google:  GOOGL) increased by 9% during the quarter, and the company size relative to its peers helps explain the vast majority of the sector’s performance. Google’s market cap is 8x larger than its next largest “peer” in Netflix, and it is 160 times that of the average market cap of its Digital Media peers.  Google beat expectations across all metrics (revenue, EBITDA, free cash flow) and guided to improved profitability as it streamlines workflows. The company is also increasingly perceived as a beneficiary of AI.  While Alphabet shares performed well, they mask the fact that shares of only 2 of the sector’s 12 stocks were up during the third quarter. The other Digital Media stock that performed well in the quarter was FUBO (FUBO), whose shares increased by 29% in 3Q 2023.  Of the 10 other digital content providers in the sector, 7 of them posted double-digit stock price declines in the third quarter.     

Large Cap Meta Powers the Social Media Index Higher

Shares in Meta Platforms (formerly Facebook) rose for the third straight quarter. Shares increased by 5% and were up 150% through the first nine months of the year. Meta shares increased by 8% at the start of the third quarter due to excitement around the launch of Threads, Meta’s answer to Twitter.  Over 100 million people signed up for Threads within the first five days of its rollout and positions the company well for continued revenue growth once it begins to monetize this new opportunity.    

As with the Digital Media Index, the Social Media Index masked underlying weakness across several smaller cap stocks.  Of the 6 stocks in the Social Media Index, only Meta shares increased during the quarter.  Several social media companies performed poorly during the quarter including Spark Networks (LOVL.Y: -59%), which filed to delist its shares, Nextdoor Holdings (KIND: -44%), which has struggled to reach profitability, and Snap (SNAP: -25%), which guided to revenue declines in 3Q 2023.    

“No Love” For Small Cap Stocks

As was the case in the Digital Media and Social Media sectors, the same trends held true in the other sectors:  in general, large cap stocks outperformed small cap stocks. For example, Noble’s Video Gaming Index increased by 3% in the third quarter, driven by Activision Blizzard (ATVI: +11%), and to a lesser extent SciPlay Corp (SCP: +16%).  However, 7 other stocks in the video gaming sector posted stock price declines in the third quarter. Larger cap names such as EA Sports (EA: -7%) and Take-Two Interactive (TTWO: -5%) posted mid-single digit stock price declines while every small cap video gaming stock posted double digit declines. 

Noble’s Ad Tech Index increased by 1% during the quarter driven by shares of AppLovin (APP: +55%), and Taboola (TBLA: +22%).  However, just 7 of the sector’s 20 stocks were up for the quarter, and 10 stocks in the sector posted double digit declines. One of our favorites is an attractive growth, small cap company, Direct Digital. The DRCT shares declined 20% in the quarter, in spite of posting favorable Q2 revenue that beat expectations and raising full year revenue estimates. Direct Digital leads our list of favorites in the digital Ad Tech companies. As Figure #4  Ad Tech Comparables indicate, Direct Digital is among the cheapest in the industry trading at 4.7 Enterprise Value to our 2024 adj. EBITDA estimate, well below larger cap peers trading at multiples of 12, 13, or even much higher. Finally, Noble’s MarTech Index decreased by 3% (the only index that declined during the quarter), with the sector’s largest companies, Adobe (ADBE: +4%) and Shopify (SHOP: -16%) posting mixed results. Outside of these mega-cap stocks, the theme of underlying weakness prevailed: only 5 of the 20 stocks in the sector posted stock price increases, while one was flat and the other 14 were down.  Eleven of the 20 stocks in the MarTech sector posted double digit stock price declines. One of our favorites in the sector, Harte Hanks performed well in the quarter up 18.8%. This was a welcomed bounce from the steep decline in the shares over the past 12 months, down 44%. The company stumbled on quarterly expectations. We believe that the sell-off was over done, providing a compelling opportunity for investors. As Figure #5  MarTech Comparables illustrates, the HHS shares trade at 3.8 times Enterprise Value to our 2024 adj. EBITDA estimate, a fraction of the multiples of many of its larger cap peers. We view the HHS shares as among our favorites in the sector.   

Figure #4 Ad Tech Comparables

Source: Company filings & Eikon

Figure #5 MarTech Comparables

Source: Noble estimates & Company filings

Traditional Media

Virtually all traditional media stocks underperformed the general market in the past quarter and trailing 12 months, as illustrated in Figure #6  Traditional Media LTM Performance, save the Publishing group. In the latest quarter, Publishing stocks outperformed the general market, up 3.0% versus down 3.6% for the general market as measured by the S&P 500 Index. The average Publishing stock is up 6.9% over the past 12 months, with some of the larger cap publishing stocks up significantly more, over 20%. More details on the Publishing performance is in the Publishing section of this report. In the last quarter, the Radio stocks were the worse performing group, down on average 10.2%, As illustrated in Figure #7 Traditional Media 3-Month Performance. In addition, the Radio stocks were the worst performing group in the third quarter as well, down and average of 12.7% for the quarter.  

Figure #6 Traditional Media LTM Performance

Source: Capital IQ

Figure #7 Traditional Media 3-Month Performance 

Source: Capital IQ

Television Broadcasting

Have the TV stocks discounted too much?

We believe that the economic headwinds of rising interest rates and inflation have begun to hit local advertising. Local advertising had been relatively stable, favorably influenced by a resurgence of Auto advertising. Notably, local advertising fared much better than national advertising, which was down in the absence of Political advertising. As we look toward the fourth quarter, local advertising appears to be weakening. But, notably, national advertising appears to be doing much better, driven by an early influx of Political advertising. While it was assumed that Political would increase in the fourth quarter due to the run-off of the Republican presidential candidates, especially in early primary States, we believe that President Biden has recently stepped-up advertising, particularly to the Hispanic community. We have noticed Biden advertising even in Florida! So, what does this mean for media fundamentals?

It is difficult to predict where Political dollars will be spent and not all Political dollars will be spent evenly, geographically or by stations in a particular market. Furthermore, Political dollars may be pulled back in a market should a particular candidate pull ahead in the polls. Political dollars were anticipated to be spent in early primary States, specifically for the Republican candidates. But, the Biden money is a surprise. Biden appears to be spending early and in areas to solidify a key voting block, Hispanics. Of course, the Biden campaign may broaden its spending to other voting blocks as well. In our view, 2024 will be a banner year for Political advertising given the large amount of Political fundraising by the candidates and by Political Action Committees. The prospect of weak local advertising, however, may cast a pall over the current expected strong revenue growth in 2024. Many analysts, including myself, expected that economic prospects would improve in 2024, which would have provided a favorable tailwind for a significant improvement in total TV advertising in 2024. Certainly, it is likely that the Fed may lower interest rates in 2024, potentially providing a boost to local advertising prospects, but that improvement may come late in the year. But, overall, in spite of the weakening Local advertising environment, given the improving National advertising trends, overall TV advertising appears to have stabilized. 

For now, we are cautiously optimistic about 2024, with the caveat that revenue growth may be somewhat tempered given the current weak local advertising trends. Nonetheless, we believe that we are nearing the trough for this economic cycle. Some companies, like E.W. Scripps, are in a favorable cycle for Retransmission renewals. Retransmission revenues now account for a hefty 50% of Scripps’ total broadcast revenue. In Scripps’ case, 75% of its subscribers are under renewal, which it recently announced was completed. As such, the company reaffirmed guidance that Retransmission revenue will increase 15% in 2024 and lead to a substantial increase in net Retransmission revenue. We remain constructive on TV stocks, as high margin Political advertising should boost balance sheets and improve stock valuations.

In the latest quarter, TV stocks underperformed the general market. As Figure #7 Traditional Media 3-Month Performanceillustrates, the Noble TV Index decreased 13.2%, underperforming the 3.6% decline in the general market as measured by the S&P 500. The poor performance of the latest quarter adversely affected the trailing 12 month performance, bringing the Noble TV Index to a 17.6% decline for the trailing 12 months. Individual stocks performed more poorly, with only the shares of Fox Corporation registering a modest gain for the trailing 12 months of 2.7%. The Noble TV Index is market cap weighted, and, as such, Fox with a $15 billion market cap, carried the index. Outside of the relatively strong performance of this large cap stock, all of the TV stocks were down and down big, between 18% to 59% over the past 12 months. 

We believe that investors have shied away from cyclicals, smaller cap stocks, and from companies with higher debt levels. This accounts for the poor performance of Gray Television and E.W. Scripps, both of which have elevated debt leverage given recent acquisitions. Both were among the poorest performers for the latest quarter and for the trailing 12 months. The GTN shares were down 12% in the third quarter and 38% for the last 12 months; the SSP shares down 40% and 58%, respectively.

We believe that the sell-off has been overdone, especially as the industry is expected to cycle toward an improved fundamental environment in 2024. As Figure #8 TV Industry Comparables indicate, the Broadcast TV stocks trade at a modest 5.3 times Enterprise Value to our 2024 adj. EBITDA estimates, well below historic 20 year average trading multiples of 8 to 12 times. We believe that the depressed valuations largely discount the prospect of an economic downturn and do not reflect the revenue and cash flow upside as we cycle into a Political year. Given the steep valuation discount to historic levels, we believe that the stocks are 15% to 20% below levels where the stocks normally would be given a favorable Political cycle. Our favorites in the TV space include: Entravision (EVC), one of the beneficiaries of the influx of Political advertising to Hispanics; E.W. Scripps (SSP), a play on Political, with the favorable fundamental tailwind of strong Retransmission revenue growth; and, Gray Television (GTN), one of the leading Political advertising plays. 

Figure #8 TV Industry Comparables

Source: Noble estimates & Eikon

Radio Broadcasting

Shoring up balance sheets. 

The Radio industry has struggled in the first half as National advertising weakened throughout the year. On average National advertising was down roughly20% or more for many Radio broadcasters. Local held up relatively well, although down in the range of 3% to 5%. Fortunately, for many broadcasters, a push into Digital, which grew in the first half, helped to stabilize total company revenues. As we look to the fourth quarter, we believe that Local advertising is weakening, expected to be down in the range of 5% to 7%, or more in some of the larger markets. But, for some, National advertising is improving, driven by Political advertising. But, Political is not evenly spread. As such, we anticipate that there will be a cautious outlook for many in the industry for the second half of the year. 

For some in the industry, the challenged revenue environment has put a strain on managing cash flows to maintain hefty debt loads. We believe that debt leverage is among the top concern for investors. Many of the poorest performing stocks in the quarter and for the trailing 12 months carry some of the highest debt leverage in the industry. The Noble Radio Index decreased a significant 13.7% in the latest quarter compared with a 3.7% decline for the general market. But, a look at the individual stock performance tells a more disappointing story. The shares of Salem Media declined 38% in the latest quarter, bringing 12 month performance to a 44% decline. The shares of iHeart Media decline 49% for the year. 

Notably, Salem Media assuaged much of its liquidity concerns with recent asset sales. Such sales will bring in roughly $30 million, allowing it to fully pay off its $22 million revolver and have some flexibility with remaining cash on its balance sheet. We do not believe that investors have fully credited the significance of the recent asset sales. 

One bright spot in the group has been the shares of Townsquare Media. While the TSQ shares gave back a significant 27% in the third quarter, the shares are still up 20% over the past 12 months, among one of the best performance in the industry. We believe that the company’s initiation of a substantial dividend resonated with investors. 

While the industry faces fundamental headwinds given the current economic challenges, we believe that most companies have made a shift toward faster growth, digital business models. In addition, we believe that Radio will see a lift from Political advertising in 2024, although not to the extent that the TV industry will see. Nonetheless, we look for an improving advertising scenario in 2024. As such, we are constructive on the industry. One of our current favorites leads the industry in its Digital transition, Townsquare Media. As Figure #9 Radio Industry Comparables indicates, the TSQ shares are among the cheapest in the industry, trading at 5.1 times EV to our 2024 adj. EBITDA estimate, well below the average of 7.1 times for the industry. In addition, we like Saga Communications, one of the cheapest stocks in the industry, trading near 4 times EV to 2024 adj. EBITDA. 

Figure #9 Radio Industry Comparables

Source: Noble estimates & Eikon

Publishing

Further cost cutting will cut deep. 

Publishers are not likely to be spared from the weakening local advertising business. But, publishers have a play book on areas to cut expenses to manage cash flows. Certainly, we believe that its Digital businesses should help offset some of the anticipated revenue declines on its print legacy business. We believe that publishers are eliminating print days. Such a move likely will indicate further pressure on print revenues, but would not proportionately decrease cash flow. Some print days have very little advertising and/or advertisers may shift some spending to other print days. Lee Enterprises indicated in its last call that it will go down to 3 print days in 44 of its smaller markets. We believe that the move has been a success. While revenues may have decreased slightly more than expected given the current weak advertising environment, we believe that cost savings have been more than anticipated. 

While many publishers would like to have a long runway for its cash flowing print business, such possible moves would necessarily increase the digital transition. Notably, with just some stabilization of revenues on the print side, many publishers have the potential to show total company revenue growth given benefit from digital revenue. With the prospect of strategies that may cut print days and the current weak local advertising environment, we believe that total revenue growth may be pushed out to 2025. 

Many of the Publishing stocks were written off long ago. But, surprisingly, the Publishing stocks have been among the best stock performers in the latest quarter and for the trailing 12 months. The Noble Publishing Index increased a solid 36% in the trailing 12 months, outperforming the general market (as measured by the S&P 500) of 19% in the comparable time frame. In the third quarter, Publishing stocks increased 3.5%, outperforming the S&P 500, which declined 3.7%. All of the publishers increased, with the exception of Lee Enterprises. The Lee shares increased substantially a year earlier on takeover rumors. Since then the shares have come back down to earth, while the rest of the industry moved higher. The stronger performers in the industry, however, were the larger cap companies, such as News Corp and The New York Times. In the latest quarter, the shares of The New York Times increased roughly 5% and the shares are up 27% for the trailing 12 months. The shares of Gannett increased a solid 9% in the latest quarter, as well. 

As Figure #10 Publishing Industry Comparables illustrate, there is a disparity among some of the larger, more diversified companies, like The New York Times and News Corporation. The NYT shares trade at a hefty 15.7 times EV to 2024 adj. EBITDA estimates, well above much of the pack currently trading in the 5 multiple range. We believe that this valuation gap should narrow, especially as many of the companies, like Lee and Gannett, have a burgeoning Digital business. While the industry faces secular challenges of its Print business and there are economic headwinds in the very near term, we believe that companies like Lee Enterprises have the ability to manage cash flows and grow its Digital businesses. Given the compelling stock valuation disparity, the shares of Lee Enterprises lead our list of favorites in the sector. 

Figure #10 Publishing Industry Comparables 

Source: Noble estimates & Eikon

For more information and disclosures on companies mentioned in this report, click on the following:

Beasley Broadcast

Cumulus Media

Direct Digital Holdings

Entravision

E.W. Scripps

Harte Hanks

Gray Television

Lee Enterprises

Saga Communications

Salem Media Group

Townsquare Media 

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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE

Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
FINRA licenses 7, 24, 63, 87

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Monday, October 17, 2022

Michael Kupinski, Director of Research, Noble Capital Markets, Inc.

Patrick McCann, Research Associate, Noble Capital Markets, Inc.

Jacob Mutchler, Research Associate, Noble Capital Markets, Inc.

Refer to the bottom of the report for important disclosures

Overview. Develop a shopping list. This report focuses on the looming economic recession and how investors should position portfolios for the prospect of an economic recovery. But, a more important theme of this report is for investors not to look for the past leaders in the industry as the best way to play a rebound. In this report, we look beyond a rebound play and focus on our favorite growth plays. 

Digital Media:  The smaller beat the goliaths. Two of our current favorites in the AdTech and MarTech industries performed better than most of its respective peers in the quarter. Can the momentum continue?

Television Broadcasting: Will political carry the quarter? With signs of weakening National advertising, broadcasters are looking forward toward Q4 Political as an offset. Political advertising, however, is not usually evenly spent across all markets. There may be winners and some losers. 

Radio Broadcasting: Polishing its tarnished image. One of the epic fails of the radio industry has been Audacy, once one of the leadership companies of the industry. The AUD shares are down a staggering 95% from highs in March 2021. New industry leaders are emerging and they are not focused on radio. We highlight a few of our current favorites. 

Publishing: Once a leader, now a loser. It is hard to believe that Gannett was once a $90 stock and held a record for one of the longest strings of quarterly earnings gains in the S&P 500 Index. The shares are down 80% from year earlier highs to near $1.37. We believe that investors should take a look at a company that has developed into an impressive Digital Media publisher.

Overview 

Develop A Shopping List

The best time to buy stocks is typically in the midst of an economic recession. Investors begin to look beyond the economic weakness and begin positioning portfolios for an economic rebound. The hard part is determining when the economy is in the middle of the downturn. It appears by all standard definitions of an economic downturn that the U.S. is in an economic recession. But, how long will a downturn last? Should investors try to be cute to predict the midpoint of the downturn?

Many economic pundits paint the current state of the economy against the canvas of the 1970s, a period of high inflation and low economic growth. There are many similarities. The Federal Reserve in the early 70s was willing to provide cheap money to fuel the economy, without much concern about inflation. In the second half of the 70s, the economy was rocked by fuel supply shortages and high inflation. During the Covid pandemic, both fiscal and monetary policy was designed to provide liquidity and to make sure that people were able to pay their bills during the economic lockdowns. This had the affect of increasing personal income, even though GDP declined 31.4% in 2020. As the economy reopened, there was significant demand for goods and services, some of which were in short supply because of the previous and recurring economic lock downs. Simplistically, this fueled inflation, high demand with a consumer that had disposable income and limited supply.

As Figure #1 Early 1970s chart illustrates, the US economy grew 9.8%, as measured by real GDP, from January 1972 to September 1975. Notably, the stock market, as measured by the S&P 500 Index, declined a significant 18.6%. This was a period marked by rising inflation due to government spending. The inflation rate, as measured by the US Bureau of Labor Statistics, was a reasonable 3.3% in 1972, but increased to 11.1% in 1974 and then moderated slightly to 9.1% in 1975. The inflation rate remained above 5% for the following 3 years.

Figure #1 Early 1970s

Source: US Bureau of Economic Analysis and Yahoo Finance.

Given the current state of rising energy prices, many pundits paint the current US economic plight similar to the period of fuel shortages of the late 1970s. As Figure #2 Late 1970s illustrates, the US economy, as measured by real GDP, grew 13.5% from January 1977 to October 1981, an average of slightly more than 3% per year. Notably, inflation increased significantly, from 6.5% in 1977 to 11.3% in 1979, followed by 13.5% in 1980, and 10.3% in 1981. The stock market, as measured by the S&P 500 Index, did not react well, up 9.3% from January 1977 to October 1981, an average of 2.3% growth.

Figure #2 Late 1970s

Source: US Bureau of Economic Analysis and Yahoo Finance.

So, where are we now? In the present, the Covid induced government spending and stimulus related fiscal policy, large spending on the Ukraine war, and a Fed unwilling to rein in early signs of inflation has put the US in a dire economic position. Certainly, supply chain shortages contributed to the current rise in inflation, as well. The Fed now appears to have religion on inflation and is aggressively raising interest rates. The Fed indicated that it is willing to create economic pain to arrest inflationary pressures. Most certainly this will cause additional economic weakness. The stock market in the near to intermediate term will need to digest the likelihood of weakening corporate profits, as well. Furthermore, as it relates to the equity markets, other investment classes, such as bonds, may become more appealing, taking demand from the stock market.

We believe that arresting inflation would set a favorable trajectory for the stock market, as investors position for the prospect of an economic recovery. To some degree, the 24.4% drop in the stock market, as measured by the S&P 500 index, from January 2022 to near current levels, anticipate some of the headwinds for investors described earlier in this report, including weakening corporate profits, the prospect of a further weakened US, and, even global economy, a move toward other investment classes, and stubborn inflation. What is different this time is that the Fed now appears to be aggressively tackling inflation. As such, the 47% drop in the stock market from highs in 1973 to the low in 1974 may not be a prelude to the current environment. It was a different Fed and it took different actions.

We encourage a different approach than trying to time the market. Our advice is for investors to develop a shopping list and begin accumulating. But, be selective.

We believe that the leadership companies of the past economic downturns are not likely to be the best positioned for the looming economic downturn or the recovery. Many of the larger cap names in each sector have fallen on hard times. This is discussed more fully in the following sector reports. Those that appear to be well positioned are companies that have diversified revenue streams, transitioned to faster growth digital businesses, and pared down debt. We encourage investors to focus on these companies given the prospect of faster revenue and cash flow growth coming out of the possible recession. Some of our current favorites include Entravision, Townsquare Media, Salem Media, Harte Hanks, Direct Digital, and Lee Enterprises. These companies are discussed in the following sector summaries.

Internet & Digital Media

Internet and Digital Media stocks declined for the fourth consecutive quarter in a row, as Figure #3 Internet & Digital Media Stock Performance illustrates.  It wasn’t all bad, as Noble’s Ad Tech Index outperformed the general market, as measured by the S&P 500 Index, up +7%. Comparatively, the S&P 500 Index decreased by 5%. Figure #4 Internet & Digital Media Q3 Performance reflects the outperformance of the AdTech sector. AdTech also materially outperformed Noble’s other Internet & Digital Media subsectors, including Noble’s Digital Media Index (-10%); Social Media Index (-15%) and MarTech Index (-16%). Notably, some of our closely followed companies significantly outperformed the respective peer group and outperformed the general market, discussed later in this report.      

Figure #3 Internet & Digital Media LTM Stock Performance

Source: Capital IQ

Figure #4 Internet & Digital Media Q3 Stock Performance

Source: Capital IQ

Marketing Technology

Harte Hanks shines in MarTech

The worst performing sector was the MarTech sector, which is also the least profitable sector. This likely explains the sector’s underperformance.  Only 4 of the 24 companies we monitor in this sector generate positive EBITDA, and investors migrated away from unprofitable growth stocks towards more profitable companies or defensive sectors that might withstand a recession better.  Investors would clearly like to see companies in this sector accelerate their path to profitability, and most companies in the sector are responding accordingly.  To be fair, some of the companies that aren’t EBITDA positive do generate positive cash flow from operations, which is a quirk of SaaS software accounting.  Of the two dozen companies in this sector, the only stock that was up during the quarter was Harte-Hanks (HHS), whose shares increased by 68%. HHS continues to generate improved operating results while lowering its debt and pension obligations. 

MarTech stocks have also been victims of their own success.  Earlier this year the group traded at average revenue and EBITDA multiples of 8.5x and 70.8x, respectively.  Today the same group trades at average revenue and EBITDA multiples of 4.5x and 30.1x, respectively. Stocks like Shopify (SHOP), and Hubspot (HUBS) entered the year trading at 22.2x and 14.7x 2022E revenues, respectively, and now trade at 5.3x, and 7.7x, respectively.  Some of this appears to be a Covid-related hangover:  when Covid hit, retail companies needed to emphasize their online channels, and companies like Shopify benefited.  As consumers return to stores, growth has moderated.  Shopify aside, the broader message investors seem to be sending is that recurring revenues are great, but not if they are paired with EBITDA losses at a time when economy appears to be heading into a potential recession.

As Figure #5 Marketing Tech Comparables illustrate, the shares of Harte Hanks is among the cheapest in the sector, currently trading at 5.1 times Enterprise Value to our 2023 adj. EBITDA estimate. We believe that the modest stock valuation relative to peers, currently trading on average at 12.9 times, illustrates the head room for the stock in spite of the 68% move in the latest quarter. The shares of HHS continue to be among our favorites in the sector.

Figure #5 Marketing Tech Comparables

Source: Eikon, Company filings and Nobles estimates

Advertising Technology

Direct Digital exceeds peers

Noble’s AdTech Index was the worst performing Index of the group in the second quarter when it was down 39%. As such, it was nice to see a better performance in the third quarter. In addition, Noble Indices are market cap weighted, and we attribute the relative strength of the Ad Tech Index to the performance of The Trade Desk (TTD), the Ad Tech sectors largest market cap company, whose shares were up 42% during the quarter. Other notable performers were Digital Media Solutions (DMS; +73%) which announced a deal to be taken private, and Zeta Global (ZETA; +46%), whose 2Q results significantly exceeded guidance. Despite the relative strength of the sector, returns were not broad-based: only 9 of the 23 stocks in the Ad Tech sector were up during the quarter. 

One of our closely followed companies, Direct Digital (DRCT) had a strong performance, up 75% in the quarter. The company’s second quarter exceeded expectations and the company raised full year 2022 revenue and cash flow guidance by a significant 40%. The company appears to be bucking the downward trend in National advertising, which is reflected in its peer group quarterly performance.

As Figure #6 Advertising Tech Comparables illustrate, Direct Digital Holdings is trading near the averages in terms of Enterprise Value to the 2023 adj. EBITDA estimate. We would note that this valuation is low considering that the company is outperforming its peers. As such, we believe that there is a valuation gap and we continue to view DRCT shares as among our favorites.

Figure #6 Advertising Tech Comparables

Source: Eikon, Company filings and Nobles estimates 

Traditional Media

Downward trends, but some bright spots

The Traditional Media stocks have had tough sledding this year. As Figure #7 Traditional Media LTM Stock Performance illustrates, all of Noble’s Traditional Media Indices have declined over the past 12 months and each have underperformed the general market. The downward spiral seemed to have moderated somewhat in the third quarter.

Notably, during the third quarter, many of the stocks had a very nice bounce before resuming a downward trend, as Figure #8 Traditional Media Q3 Stock Performance illustrates. At one point in the latest quarter, stocks were up as high as 30% from the second quarter end. It is important to note that only the Publishing stocks outperformed the general market in the latest quarter.  A description of the traditional media sectors follow with our favorite picks for the upcoming quarter and year.  

Figure #7 Traditional Media LTM Stock Performance

Source: Capital IQ

Figure #8 Traditional Media Q3 Stock Performance

Source: Capital IQ

Television Broadcasting

Noble’s TV Index dropped 10.1% in the third quarter, underperforming the broader market (-5.3%), illustrated in Figure #8 Traditional Media Q3 Stock Performance. As we indicated in our previous quarterly report, we believe that there would be a trading opportunity in the media stocks. The latest quarter stock performance indicated that. Many of the TV stocks had a strong performance from the end of the second quarter (June 30) to highs achieved in August. Many of the TV stocks increased a strong 25% on average. It is instructive to know that E.W. Scripps had the largest advance from June 30 lows, up 31% to highs achieved August 16. When the industry is in favor, the shares of E.W. Scripps tends to outperform its industry peers. The shares of Entravision (EVC) were the next best performing within the quarter, up 30%, before trading lower and ending down 12%.

The TV stocks were challenged by macro economic pressures such as inflation, rising cost of borrowing, and a Fed determined to curb inflation by slowing the economy. In the end, interest rate increases by the Fed curbed enthusiasm for TV stocks and the Noble TV Index ended the third quarter down.

As Figure #9 Q2 YOY Revenue Growth illustrates, the average television company reported 11.1% revenue growth in the latest quarter. Most broadcasters were very optimistic about Political advertising, with some raising forecasts to be near the levels of the Presidential election, a highwater mark. We would note that Entravision had the highest revenue performance in the quarter, up 24%, as the company continues to benefit from its transition toward faster growth Digital, which now accounts for over 80% of its total company revenues.

Industry adj. EBITDA margins were healthy, as Figure #10 Q2 EBITDA margins illustrate, with the average margin for the industry at 25.5%. It is notable to mention that Entravision margins appear to be significantly below that of the industry at 10.1%. Its Digital business is a rep business, and, as such, the company reports revenues on a net basis and not gross revenues. While a rep business tends to be a lower margin business, the reporting of rep revenues gives the appearance of very low margins. The company is in a strong cash flow and free cash flow position.

Most companies will be reporting third quarter financial results in the first two weeks in November. We believe that the third quarter will reflect an influx of Political advertising, even though the lion’s share of the Political advertising likely will fall in the fourth quarter. Consequently, we believe that the third quarter revenue growth will be better than the second quarter, showing some acceleration. With signs of weakening National advertising, and a likely weakening Local advertising environment in some larger markets, broadcasters are looking forward toward Q4 Political as an offset. Many broadcasters indicated that Political advertising may be at record levels in 2022, even higher than the Presidential election year of 2020. Political advertising, however, is not usually evenly spent across all markets. As such, there may be winners and some disappointment. 

Investors are not encouraged to buy a Television broadcaster on the basis of the upcoming fourth quarter Political advertising influx. There are broader issues at play, like cord cutting, slowing Retransmission revenue growth, and the prospect for a weakening economy. We believe broadcasters with minimal emphasis on National advertising, a larger focus on small to medium size markets and local advertising, are best positioned to weather an economic downturn. We also like companies that do not have high debt leverage. In addition, we like diversified companies that can benefit from cord cutting, like E.W. Scripps, or have diversified revenue streams and large fast growing digital businesses, like Entravision. As Figure #11 TV Industry Comparables illustrate, the shares of Entravision are among the cheapest in the industry and the EVC shares leads our favorites in the industry.

Figure #9 TV Industry Q2 YoY Revenue Growth

Source: Eikon and Company filings

Figure #10 TV Industry Q2 EBITDA Margins

Source: Eikon and Company filings

Figure #11 TV Industry Comparables

Source: Eikon, Company filings and Nobles estimates

Radio Broadcasting

Polishing its tarnished image

One of the epic fails of the radio industry has been Audacy, once one of the leadership companies in the industry. The AUD shares are down a staggering 95% from highs in March 2021. The poor stock performance reflects the poor revenue and cash flow performance and high debt levels at the company. Recently, the company announced that it plans to sell some of its prized assets, including its podcasting business, Cadence 13, in an effort to more aggressively pare down debt. While Audacy struggles, there are emerging leaders in the industry, many that are not focused on its radio business, discussed later in this report. 

As Figure #12 Radio Industry Q2 YoY Revenue Growth chart illustrates, the average radio revenue grew 8.9%. Companies that were at the top of the list of revenue growth had diversified revenue streams. Townsquare Media was the best performer, with Q2 revenue growth of 13.6%. We believe that Townsquare also benefits from significantly lower National advertising and concentration on less cyclical larger markets. Other diversified companies that performed better than the lower growth companies in the group were Salem Media and Beasley Broadcasting. Salem Media has diversified into content creation and digital media and Beasley recently accelerated its push into Digital Media. Separately, Beasley recently announced a station swap with Audacy, which will enhance its position with its four existing stations in Las Vegas.

On the margin front, Townsquare Media also was among the leaders in the industry. Notably, Townsquare Media’s digital business carries margins similar to its Radio businesses, near 30%. As such, its investments in Digital Media are not depressing its total company margins. As Figure #13 Q2 Radio Industry EBITDA Margins illustrate, Townsquare’s Q2 adj. EBITDA margins were 26.6%, well above that of the larger industry peers like iHeart (24.9%), Cumulus Media (19.2%), and Audacy (12.0%).

In looking forward toward the upcoming third quarter results, which will be released in coming weeks, we believe that the effects of rising inflation and weakening economy will start to show. Many of the larger broadcasters which focus on larger markets, have national network business, may disappoint. In addition, we believe that there will be spotty Political advertising performances. In our view, the resulting potential weakness in the stocks may create an opportunity to more aggressively accumulate or establish positions.

Radio stocks largely mirrored the performance of the TV industry, falling 9% in the third quarter, illustrated above, in Figure #8 Traditional Media Q3 Stock Performance. Last quarter we pointed out that large industry players such as Audacy and iHeart had an outsized negative impact on the market cap-weighted index. This was due to the stocks being downgraded by a Wal Street firm on the basis of high leverage in a time of recession.

However, there are several broadcasters in the Radio industry with improving leverage profiles. Furthermore, we believe that in a time when traditional radio companies are making a transition to more digitally based revenue sources, investors would do well to differentiate among them on that basis as well. In our view, certain companies are ahead of peers in the digital transformation and are better shielded from certain fundamental headwinds that have traditionally plagued radio broadcasters in prior recessions. We encourage investors to focus on Townsquare Media (TSQ), Salem Media (SALM), and Beasley Broadcasting (BBGI). As Figure #14 Radio Industry Comparables highlights, Townsquare Media, Cumulus Media, and Salem Media are among the cheapest in the group.

Figure #12 Radio Industry Q2 YoY Revenue Growth

Source: Eikon and Company filings

Figure #13 Q2 Radio Industry EBITDA Margins

Source: Eikon and Company filings

Figure #14 Radio Industry Comparables

Source: Eikon, Company filings and Nobles estimates

Publishing

Once a leader, now a loser

It is hard to believe that Gannett was once a $90 stock and held a record for one of the longest strings of quarterly earnings gains in the S&P 500 Index. The shares are down 80% from year earlier highs to near $1.37. For some anti newspaper investors, this is a “told you so” moment. But, this view missed notable exceptions, like the New York Times, which seemed to transition more quickly toward Digital revenues. There are publishers that are set apart from the weak trends at Gannett and are on a favorable trajectory toward a Digital future. As such, we believe that investors should not throw the baby out with the bathwater or avoid the industry. There are gems here, which is discussed later in this report. 

There were sizable differences in the financial performance of the companies in the publishing group. As Figure #15 Publishing Industry Q2 YoY Revenue Performance chart illustrates, Q2 publishing revenue declined on average 1.5%. The notable exceptions to this performance was The New York Times, up 11.5%, News Corp, up 7.3%, and Lee Enterprises, down a modest 0.7%.  The improved performance into the ranks of the leaders in the industry is quite notable. Lee’s digital subscriptions currently lead the industry. The company has exceeded all of its peers in terms of digital subscription growth in the past 11 consecutive quarters. Furthermore, over 50% of its advertising is derived from digital. Currently, roughly 30% of the company total revenues are derived from Digital, still short of the 55% at The New York Times, but closing the gap.

Not only is Lee performing well on the Digital revenue front, it has industry leading margins. As Figure #16 Q2 Publishing Industry EBITDA Margins illustrates, Lee’s Q2 EBITDA margins were 11.8%, in line with News Corp and second only to the New York Times at 17.4%. We believe that margins should improve over time as the company continues to migrate toward a higher digital margin business model.  

Illustrated above in Figure #8 Traditional Media Q3 Stock Performance is Noble’s Publishing Index, which decreased a modest 2.4% in the quarter, outperforming the S&P (-5.3%). The relatively favorable performance of the index was primarily due to its largest constituents, News Corp. and The New York Times, which rebounded from -29.7% and -39.1%, respectively in Q2, to -3% and +3%, respectively, in Q3. The average percentage change of the stocks in the industry was -16.2%, more in line with Traditional Media as a whole.  One of the poor performing stocks in the index for the quarter was Gannett (GCI) which declined 47%. It was recently reported that the company implemented austerity measures included unpaid leave and voluntary layoffs. In the case of Lee Enterprises, the shares were down a much more modest 7%, more in line with the general market. In our view, the company is expected to report favorable third quarter results and the shares are undervalued.

As Figure #17 Publishing Industry Comparables chart illustrates, the LEE shares trade at an average industry multiple of 5.8 times Enterprise Value to our 2023 adj. EBITDA estimate. Notably, the company is closing the gap with its Digital Media revenue contribution to that of New York Times, which is currently trading at an estimated 14.5 times EV to 2023 adj. EBITDA. We believe that the valuation gap with the New York Times should close as well. In recent Lee Enterprise news, a buyout specialist investor filed a 13D and indicated interest in taking the company private.While financial players continue to circle the wagons for Lee, we believe that investors should take note. In our view, the LEE shares are compelling and offer a favorable risk/reward relationship.

Figure #15 Publishing Industry Q2 YoY Revenue Growth

Source: Eikon and Company filings

Figure #16  Q2 Publishing Industry EBITDA Margins

Source: Eikon and Company filings

Figure #17 Publishing Industry Comparables 

Source: Eikon, Company filings and Nobles estimates

Reports with important disclosure information of companies highlighted in this report may be found here:

Beasley Broadcasting

Cumulus Media

Direct Digital Holdings

Entravision

E.W. Scripps

Harte Hanks

Lee Enterprises

Salem Media Group

Townsquare Media

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Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
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