Idea List: Issue #11

This week I analyzed Urban One and Molson Coors Beverage

In this post I want to share two stock ideas that appear to be undervalued. These companies came from the “top of the funnel” of my research process, meaning they came from stock screeners, or recommendations from Twitter and Substack. What I want to do here is present some qualitative and quantitative metrics that determine if I should keep researching the stock or take a pass on it. Further, I want to do a basic valuation to verify that the company is actually undervalued. The end goal is to have some semi-vetted stock ideas that I can add to a watchlist and start doing more thorough research on.

Urban One

Urban One UONE 0.00%↑ is a company that owns radio stations and other media assets geared towards African American audiences. The company owns 72 broadcasting stations: 57 radio stations, 13 HD stations, and 2 low power TV stations. Urban One also owns two cable TV networks, ownership in talk show media properties, and digital platforms. The revenue is approximately split into 1/3 radio, 1/3 cable tv, 1/3 from everything else. In 2019, UONE was trading around $2 a share, then it must have became a meme stock or something because it shot up to $36 for a minute, slid down to $5 for a while, and is now trading at $2 again. Over the years I have seen other radio and TV broadcasters that appeared to be selling at a discount. Broadcasters are unloved stocks because it is a dying industry. However, I think they it could be possible to manage the decline and provide value to shareholders. Urban One caught my eye because its trading at a deep discount to book value, and it seems like an interesting niche company.

Looking at the financials, Urban One’s 10 year revenue has been flat except for a dip in 2020. Operating profits peaked in 2022, then has slid below 2014 levels to $97.7M in 2023, and now $74.3M TTM. A big part of the declining profits is from restructuring asset impairment charges of $127M in 2023. UONEs interest expense was at $80M in 2019 but has declined to $56M. Interest takes a big chunk out of Urban One’s profits. Historically the company’s net income does not look great, and has bad return on assets.

Moving to the balance sheet, UONE has a debt to equity of 2.5, and a debt to EBIDTA ratio of 4x. The company’s capital structure is about 25% equity and 75% debt. The debt metrics are a bit too aggressive in my opinion since the company is in a declining industry. In the last six months Urban One has retired 94M in debt, so maybe they will get to a level that I’m more comfortable with.

As for valuation, it probably makes sense to value UONE based based on the reproduction value of their assets since they’re profits are spotty. Currently the stock is trading at 0.3x book value, so it looks cheap, but we need to look under the hood. Tangible assets consist of a decent chunk of cash at $130M, and receivables of $122M. I’ll quickly estimate the replacement cost of the property and plant by adding back depreciation, which gets a value of $50.4M. There is $216M in goodwill, which I will assume will be worth zero. Broadcast rights are valued at $294.5M, and Urban One publishes the assumptions used to value these rights. These assumptions seem to change quarter by quarter, so I think the stated book value is a reasonable valuation. The changes in broadcast rights valuations are also what are responsible for the large asset impairment I mentioned. There are other intangible assets worth $120M instead of $49M on the books if you add back amortization. Finally there are content assets stated at $82.5M and “other” assets worth $42.4M. This brings us to a grand total of $898.5M for my quick estimate of the reproduction value of Urban One’s assets.

UONEs liabilities stand at $771.2M, so my estimated value of the company’s equity is $127.3M. The company currently has a market cap of $64.6M, so it appears quite undervalued. One note is that there are two different share classes, so I haven’t worked out the fair value of the shares yet.

Urban One may be in a declining industry, but so far its revenues have held up. Profits on the other hand have been all over the place. The company looks appealing to me from a valuation perspective, but I would be cautious about buying. I would like to seem some catalysts that might drive the share price higher. This could be reducing debt, chilling out on the broadcast rights impairments, and returning cash to shareholders. I think its worth adding Urban One to my watchlist, but not rushing to add it to my portfolio.

Molson Coors Beverage

Now to take a break from no-name microcap companies, so I’ll take a look at something everyone has heard of: Molson Coors TAP 0.00%↑ . I found this stock on the Acquirers Multiple screener, and thought it would be interesting to look at a brewer. TAP trades for $55, has a $11.4B market cap, and a 3.2% dividend yield. The company brews Molson, Coors, Miller, Blue Moon, plus a variety of other drinks like cider and seltzers, and has international operations. Earlier in the year TAP was trading around $70, then it slid down to a low of $50.

The company has been generally profitable, hovering slightly above $1B. The exceptions were losses in 2020, and 2022, then a mediocre performance in 2019 with operating profits of $250M. Returns on assets are ok, but not dramatically above cost of capital so I would say that TAP does not have an economic moat. Therefore value it based on its earnings power without factoring in growth.

Management is guiding for 5% increase in profits over last year, so I’ll assume operating profit will come in at $1.68B. Then I’ll apply a 25% tax rate to get an after-tax profit of $1.26B. For a conservatively financed, stable, mid-cap stock, I think a 7% discount rate would be reasonable. That gets us an enterprise value of $18B. Then subtract $7B in debt and add back $1.7B in cash to get equity fair value of $12.7B or $59 a share. Molson Coors is slightly undervalued but I would probably want a bigger discount. TAP has a fair dividend yield, plus they have increased share buybacks. If they maintained the same level of buybacks, would be about 6% shareholder yield. The company isn’t a big grower, but should be a defensive stock that may hold up better during a recession. I’ll pass on the stock for now, but could be worth owning if you want to add more defensive stocks to your portfolio.