Sold Cash Secured Put + Investment Thesis – Entravision Communications Corporation (EVC) – $5.00 strike – SEPT 21 Expiration

This trade was actually executed on Thursday 09/06/18. I didn’t get a chance to write about it until today.

Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article. Additionally you might find my rules for trading options helpful in understanding the parameters of the trade.

In case you missed it, I’m making it a point to twitter all my trades as they happen and this was no exception.

I have updated the portfolio and income tracker pages to reflect this position.

Dividend Cycle

EVC goes ex-dividend tomorrow, 09/13/18, so I’m going to miss out on that distribution. But the premium earned from the options contracts is nearly 3X the quarterly dividend amount and the trade is only in force for 15 days, so I’ll manage somehow.

The quarterly payout is currently at $0.05/share, which is where it’s been for 5 consecutive quarters. The company has managed to achieve dividend challenger status with 2018 representing the 5th year of increases (assuming they pay at least $0.05 again in Q4). The pattern of increases has been a little erratic, but the distribution has doubled in the last 5 years which works out to a 20% growth rate.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

4

$5.00

09/21/18

$59.85

15

72.82%

$5.00

0%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

10.64%, 6.87%

10 Year Revenue CAGR

13.1%

10 Year EPS CAGR (5 Year EPS CAGR)

N/A (5.6%)

5 Year ave P/E – Current P/E (ttm)

20.6 – 2.6 = +18.0 (!!)

5 Year ave Yield – Current Yield  

1.5% – 3.9% = -2.4%

5 year mean DGR (dividend growth rate)

20%

Debt/Market Cap

$294M/$457M (64%)

Total Cash

$241.3M

Return on Assets

27.3%

Return on Equity

65.85% (!!)

Profit Margin

31.54%

EBITDA/Revenue

$301.1M/$549.2M = 54.83% (!!)

Reverse DDM Fair Value DGR at Strike

6%

Assumed DGR (DDM valuation 10% disc.)

7.5% ($8.00)

DGR Margin of Safety

1.5%

Dividend Cushion Ratio (6.12% DGR)

3.448

Cash from Ops “cushion”

-17.8%

Capex “cushion”

+25%

DGR “cushion” (delta)

+45%

SPL (Strike Price Logic)

There’s an options market for EVC but I wouldn’t exactly call it “robust”. The strike prices are $2.50 apart, which represents a 50% swing in the share price, so it was pretty much the $5.00 strike or nothing. That also happens to represent a 4% yield based on the current distribution, which is a nice round number, so it worked out.

I’m also considering opening an outright position in one of the IRAs depending on which way things go with the assignment of this contract. As long as it’s bouncing around the $5 strike price, there is an awful lot of volatility premium to pick up.

QWaF (Qualitative Warm and Fuzzy)

I believe the spanish speaking demographic in the United States is going to continue to become increasingly important in the coming years, both in terms of sheer population size and in terms of influence. EVC’s television and radio stations dominate some of the largest spanish speaking communities in the United States, so they are extremely well positioned to benefit from that culture’s rising star.

Further the investments they’ve made in digital advertising assets should help diversify their future revenue streams as conventional “analogue” media channels wane in popularity.

Plus they have a “piggy bank” of TV broadband spectrum that can potentially be further monetized in future FCC auctions.

CPR (Cold and Prickly Risks)

The internet has changed the way we consume media, and spanish speaking communities aren’t immune from this secular trend. As people watch less and less TV, EVC’s advertising revenues should be expected to decline accordingly. If that trend accelerates too quickly and/or the company can’t backstop those revenues with something else, they’re going to be in trouble.

I’m not that worried, though…for several reasons:

  1. Streaming internet services have changed the way we consume a lot of TV, but it hasn’t really changed the local news as much. As long as people watch the local news, EVC can expect SOME advertising revenue from its television assets. Plus politics are only getting more fractious, so conceivably spending on political ads should be pretty healthy (and local news is a pretty appealing platform for political advertising).
  2. Radio has been surprisingly resilient to the digital revolution. Ironically this is related to EVC’s “piggy bank”. There is only so much broadband spectrum available for cellular data. Plans are expensive and radio is free, so there you go. I think radio advertising revenues are going to be fairly stable.
  3. The company is not taking the declines in TV advertising lying down. They’ve invested heavily in their “digital advertising” assets. That segment has been growing rapidly, and presumably has a lot of runway left.

The windfall from the 2017 spectrum auction shored up the balance sheet and the dividend is extremely modest compared to current cash flows, which is exactly the kind of situation I like to see. Meanwhile the valuation ratios (yield, P/E, etc.) are really discounted.

So not only do I think it’s a pretty good income play, but there is definitely some room for share price appreciation as well.

 

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