Monday, January 09, 2006

Stern goes to outer space- back on earth...Arbitron (ARB)

Howard Stern launched his Sirius Satellite (SIRI) program this morning, apparently to not the greatest of reviews (Chicago Trib registration may be required.)

Whatever your views of Howard, whatever your views of Sirius ( though I haven’t commented publicly, I suspect that you know mine,) there has been a profound effect on terrestrial radio, and its Wall Street valuations.

I intend to review a number of the broadcasting companies to search for value over the next few weeks.

Today, however, I would like to look at Arbitron (ARB.) Arbitron is the sole source of radio measurement data in the U.S., a spectacular monopoly position. The company is absolutely critical to radio broadcasters who use the data in order to sell their air time to advertisers to demonstrate their effectiveness and penetration. On the other side of the table, Arbitron also sells its data to advertisers and agencies to help them make decisions as far as the selection of media. ARB’s relationship to radio stations is not unlike IMS Health (RX)’s relationship to the drug companies, except RX faces more competition in my opinion.

Arbitron provides measurement for 293 radio markets across the U.S. but also provides measurement for 38 national network radio audiences, consequently Clear Channel and Infinity Broadcasting, the largest national radio broadcasters are important clients.

ARB has two major projects which will affect its future, PPM, the Portable People Meter technology, and Project Apollo.

Project PPM is a passive technology to measure a consumer’s exposure to radio, TV, and cable media. It is also being deployed within Project Apollo for consumer marketing companies so they get a better idea of their return on investment for their advertising dollar, a measure of advertising effectiveness. Essentially, it should provide an answer to the age-old problem of advertisers, “I know that half of my advertising is wasted…I just don’t know which half.” The end result of this effort should be a better understanding of the combination of data to combine media data with consumption data. Both Proctor & Gamble and S.C. Johnson have signed on as sponsors of Project Apollo. VNU, the French data company is part of a joint venture in Apollo and may be accompanied by Nielsen sometime later this quarter.

The economics of this business are nothing short of spectacular. The company had operating margins of about 38% in the most recent quarter and a ROIC of almost 60%. ROE approaches 100% because of debt leverage with LT debt/ equity at 63%. Interest coverage is over twenty times.

In the TTM period, we have had $54 million in free cash flow…in fact, the last five years have shown $335 million in free cash flow. CFFO has always exceeded net income.

From a valuation standpoint, the company is trading at 12.7 times EV/EBIT.
Howard contends that radio is dead. I suspect that considerable effort will be made by radio stations and networks to prove otherwise. I also suspect that consumer products companies will be avidly following the progress of all of this as consumers of ARB product.

If the pilot projects of PPM and Apollo are adopted, this should open up international opportunities for this business as well. PPM, in fact, has already come into being in the Canadian and Singapore radio markets.

The company has been de-leveraging its balance sheet and buying back stock as well.


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