I am still working on formalizing this story but I wanted to get the idea out ASAP in light of a major development at the company this week with regard to my thesis….
Company Name: Hemisphere Media Group (HMTV)
Current Price: $10.13 Target Price: $14.00 (38% upside) Market Cap: $445mm
LTM Revenue: $95mm LTM EBITDA: $41mm (43%) 52 Wk Range: $9.09 -17.79
My view: I estimate that HMTV’s core business as it is today is worth approximately $9/share including a liquidity discount ($7.50 downside case) for the limited trading volume in the stock. At this level, the price implies the option on future growth can be bought for ~$1.15. That is the cheapest opportunity an investor will ever find to invest alongside a top notch private equity team with this type of growth potential in the underlying business. Further, given that there isn’t a single major brokerage firm on the Street that covers this stock, it is still very much an emerging story.
I have an 18 month price target of $14-16. For the record, I am long HMTV.
Company Description
US-based cable and broadcast television company focused exclusively on the US Hispanic and broader Latin American markets. The company was IPO’d in April by Intermedia Partners, a media focused PE firm. Intermedia still owns a ~58% stake. They’ve also installed their own management team – the same team that grew Telemundo from $700mm to $2.7bn in EV in four years. They’re now looking to grow the Hemisphere franchise via a roll-up acquisition strategy. I expect their acquisition focus to initially center around unique content and then broadening out over time to include other tv assets.
Hemishphere owns 2 key assets – WAPA and Cinelatino.
- WAPA consists of 2 networks. WAPA PR – the leading Puerto Rican broadcast station for 4 years running with 32% market share. Competitive advantage stems from the development of its own, locally targeted content whereas the 2 other stations (Univision and Telemundo) redistribute US content which is primarily geared towards Mexican viewers. This is a major difference in this market. #1 shows in 8 time slots. WAPA America leverages WAPA PR’s success by redistributing content to Puerto Ricans and Caribbean Hispanics in the US – the 2nd largest segment of the US Hispanic population.
- Cinelatino is the #2 Nielson-rated Spanish language movie network in the US targeting the Hispanic population broadly. It is distributed by all major cable/satellite providers in the US as well as in 15 Latin American countries. Its competitive advantage stems from a unique content library which includes exclusive ownership rights to ~70% of all major Mexican box-office releases since 2006. Plan to implement an ad supported model in 2014.
Investment Thesis
Advertising
– Hispanic cable viewership accounts for 19% of subscribers yet Hispanic targeted advertising represents only 10% of corporate ad spending. Ad spend should converge over time towards viewership.
Subscriber growth
– Pay tv penetration in Latin America more broadly is expected to grow 17% between 2012 and 2016 with cable subscriber growth increasing by 30%.
– Given Cinelatino’s current penetration level of 21% in Latin America, there are substantial opportunities for continued subscriber growth both from increased penetration rates as well as an expanding market generally.
– Underfollowed – Not a single major brokerage firm covers it.
Underlying these fundamentals, management has proven experience in building out a similar franchise and their majority ownership stake reflects serious conviction in their go-forward roll-up acquisition strategy.
In addition to a majority stake by Intermedia and large personal blocks owned by management, several hedge funds also own a significant chunk of the float – namely Luxor and Hawkeye Capital. This is well-informed smart money.
I believe the recent sell off was sparked largely by Puerto Rican sovereign concerns (and exacerbated by a lack of liquidity) yet this situation poses little risk to HMTV. First, the Island has been in recession since 2006 yet the company has continued to grow. Advertising will not stop because the public sector stumbles. Further, if the market was to contract, HMTV would be the last portion of their budget advertisers would slash given the company’s position as the dominant media outlet in PR. Finally, research indicates that cutting ad spend during downturns leads to lower market share when the economy rebounds. Therefore, I see this as an attractive point to a very “cheap” growth story.
To be clear, this is still a risky play. The stock is illiquid, trading an average of 25k shares per day. But there are numerous days in which it trades below 10k. Significant gaps up and down are common.
Notably, this past Wednesday (10/23) it traded over 1.1mm ahead of the news on Thursday that Nick Valls from Telemundo has been hired as EVP of Advertising.
I estimate that HMTV’s core business as it is today is worth approximately $9/share including a liquidity discount ($7.50 downside case), which implies the option on future growth can be bought for $1.15. That is the cheapest opportunity an investor will ever find to invest alongside a top notch private equity team.
I have an 18 month price target of $14-16. For the record, I am long HMTV.
the commonsense capitalist 