Blended Advertising And Radio Products Will Fuel Future Success

Key Takeaways

• Digital transformation and blended advertising are expected to positively impact revenue, leveraging local market presence and digital sales growth.
  
• Cost management and potential sale of tower assets aim to enhance margins, improve financial performance, and boost shareholder value.
  
• Saga Communications faces revenue decline risks due to dependence on political ads, rising operational costs, and a soft advertising market, impacting margins and future growth.

Catalysts

A media company, acquires, develops, and operates broadcast properties in the United States.

• Saga Communications is implementing a digital transformation strategy called blended advertising to tap into the growing local digital advertising market, which could double their annual gross revenue. This is likely to impact revenue positively as they aim to capture 5% of the digital advertising spend in their markets.
  
• The company is set to leverage its strong local market presence and customer trust in radio to introduce new digital products, which are seeing growth. This strategy is positioned to increase revenue, with a focus on digital sales growth complementing traditional radio sales.
  
• Despite a temporary increase in expenses due to investments in training and infrastructure for digital transformation, Saga anticipates this will be offset by improved future earnings as the digital strategy increases revenue efficiency over time.
  
• Saga's proactive measures to reduce operational expenses by 1% to 2% without impacting its investment in growth initiatives will improve net margins, contributing to a better overall financial performance.
  
• The company's potential sale of non-core tower assets, with proceeds possibly directed towards stock buybacks, is expected to enhance shareholder value and improve earnings per share (EPS).

Saga Communications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saga Communications's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 4.6% in 3 years time.
• Analysts expect earnings to reach $5.4 million (and earnings per share of $0.86) by about April 2028, up from $3.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.9x on those 2028 earnings, up from 21.5x today. This future PE is greater than the current PE for the US Media industry at 13.7x.
• Analysts expect the number of shares outstanding to grow by 2.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.44%, as per the Simply Wall St company report.

Saga Communications Future Earnings Per Share Growth

Risks

• Despite the potential for growth in digital advertising, Saga Communications is facing declining revenue, with a noted 1.3% decrease in net revenue for Q4 2024 compared to the previous year. This trend could impact future earnings if not reversed.
  
• There is a significant reliance on political advertising for revenue, which is not consistent annually. Without political ad revenue, overall gross revenue would have decreased by 4.3% in 2024, highlighting possible volatility in future revenue streams.
  
• The company is undergoing transformational changes, which have resulted in increased expenses, notably a 4.5% increase in station operating expenses for the year. This increase in costs might negatively affect net margins and profitability in the short to medium term.
  
• Saga Communications acknowledges the advertising market, especially radio, is currently soft with expectations of a decline in revenue in the first quarter. Continued softness in the market may put pressure on revenue growth overall.
  
• The company's strategy of not making substantial cuts in operations, despite financial pressures, could strain operating margins if revenue doesn't materialize as anticipated from new digital initiatives.

Valuation

• The analysts have a consensus price target of $18.0 for Saga Communications based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $118.9 million, earnings will come to $5.4 million, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $11.19, the analyst price target of $18.0 is 37.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.