Gaining a foothold in an underserved sector is one of the best ways to build a strong brand, and this company is well on its way to doing just that, writes Marc Gerstein of Forbes Low-Priced Stock Report.

Entravision Communications (EVC) owns 53 television stations and 48 radio stations that cater to Hispanic audiences (20 TV stations and 47 radio stations located within the top 50 US Hispanic markets), and it is likely to acquire more stations to add new territories and strengthen its position in regions in which it is already present.

Accordingly, this is a play on growth of the Hispanic segment of the population; numbers and buying power. But before addressing the demographic story, we have to consider an aspect of EVC some may find very challenging.

Like many media firms, EVC is extremely leveraged, with debt at $379.9 million on December 31 versus equity amounting to a deficit of $560,000. What’s more, it usually posts net losses.

Given the experience investors have had in this generation with wild and often inappropriate explanations of financial performance (see, e.g. pro forma, a concept widely and badly misused a decade ago), many don’t want to hear that in some cases, commonly accepted notions about what balance sheets and income statements should look like ought not apply.

But that doesn’t alter the reality, which for better or worse is that some businesses find it preferable to make debt a more prominent feature of their permanent capital structures. In doing so, EVC isn’t a trailblazer, but is actually following its peers.

Don’t “worry” about finding cash to pay off debt at maturities. It won’t happen. Companies like this continually refinance this permanent part of the capital structure.

Is that OK?

Every investor must decide for himself or herself. But consider that despite a bottom-line deficit and its extreme leverage, EVC actually had enough surplus cash flow to cause it to pay a 6-cent per share special dividend in 2011, and that was a down year due to the absence of political and World Cup advertising that helped 2010, a still lackluster economy, and a derivative-related charge that had the effect of boosting interest expense.

Depreciation for media companies does not reasonably reflect ongoing costs of maintaining the asset base. That’s why Wall Street is often willing to ignore it and look instead at cash flow.

In 2011, EVC was, as noted, free-cash-flow positive and the stock price to “FCF” ratio was reasonable in the mid-teens. As to the demographics:

  • Hispanics are now the largest US minority group at 16% of the population.
  • The Hispanic population is growing at about eight times the rate of the rest of the population.
  • About 78% of Hispanics age 5 and above speak some Spanish at home.
  • Although Hispanic incomes currently are lower than for other groups, it’s on the rise, and buying power is projected to grow at nearly three times the rate of non-Hispanics through 2025.
  • Hispanic families tend to be larger and younger on average than others (average of 3.4 persons age 28.4 years, versus 2.4 persons and 40.5 years of age), meaning that Hispanics tend to spend heavily on food at home, children’s clothing, footwear, household cleaning products, and mobile phones, the kinds of products that lend themselves well to broadcast advertising.

Hence, ownership of a prime vehicle for advertising to Hispanics (which, in essence, is what EVC’s television and radio stations are) seems like a nice recipe for good long-term growth.

Actually, the growth story requires more than just a potential audience. The broadcaster still has to get people to tune in. In this regard, EVC is strong. In 12 of its television markets, EVC’s local news (an important programming category), is ranked first or second among all viewers aged 18-34, regardless of language.

As to daytime and prime time programing, EVC is affiliated with Univision and its TeleFutura operation, powerhouses in Spanish-language programing. Entravision Communications is a Buy.

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