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How Will Arbitron Fare in This Market?

by: Sreeni Meka October 15, 2008 | about stocks: ARB    

Sreeni Meka

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It is hard to believe that after all the credit-crisis and market meltdown, still there are a few stocks flying high. Arbitron (ARB) is a radio audience metrics firm, whose valuation is very high even in normal market conditions. It provides audience measurements to more than 4000 radio stations and 2000 ad agencies. It popped up on my radar while I was glancing through high fliers. Arbitron has PE of 33 and trades at whopping 93 times its book value.

Arbitron has trailing a twelve-month revenue of $340 Million and has a market cap of $1 Billion dollars. Recent quarter balance sheet and income statements look much more unstable. Arbitron's current ratio is at 0.6, which means short term liabilities within a year are twice more than its current assets including cash and account receivables. Pay close attention to the return on equity portion, total assets appear at $172 million and liabilities at $160 makes $12 million and ROE appears at 60 percent. Other end total assets portion has $39 million goodwill and $1 million intangibles; if you ignore the goodwill portion this company has $27 million negative equity. Now can you measure the ROE and long-term debt to equity?

Arbitron has a very good dividend policy, i.e. $0.40 per year makes one percent yield or 40 percent of the payout ratio. As of last quarter, Arbitron has $50 million long-term debt and net interest payment is more than net income after taxes. With earnings in decline (last quarter EPS was $0.02) and market conditions getting worse, how can the company sustain its dividend policy? If the dividend is sacked, what will be the investors' reaction? Going forward with this adverse economic conditions, negative equity and excessive unhealthy debt with indigestible high valuations, I seriously doubt the sustainability of the current valuation of this equity.

Stock position: Short ARB.

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This article has 2 comments:

  •  
    Oct 15 03:59 PM
    Agreed that ARB appears to be teetering on the edge. And don't forget the recent subpoena from the NYSAG. Another company I think has an attractive liquidity position (for shorts) is WXS.

    Long puts in ARB and WXS.
    Reply
  •  
    Nov 25 01:44 PM
    Arbitron is down over 50% since this article was posted. The question is whether, at $14-ish, there is still potential for large moves to the downside. I tend to think so, and recently opened a larger position to the south.

    In its 10-Q filed November 5, 2008, the company listed $162M in total assets and $171M in total liabilities as of September 2008. The company is therefore technically insolvent by its own admission. Backing out $38M in goodwill and $1M in intangibles, the company's total liabilities exceed by almost $50M its tangible assets. This apparently has not impacted the company's ability to tap its credit lines, as Arbitron issued $125M in new LTD while paying off only $67M in existing LTD (net increase of $58M in LTD for Q3). The company is still paying its dividend, but it is not clear how much longer its lenders will keep feeding the pig.

    In addition to what appears to me to be considerable balance sheet issues, Arbitron also recently lost contracts with Cumulus and Clear Channel to Neilsen. The revenue loss for this is estimated by the company as $7M in 2009 and $10M annualized. Not that big of a deal by itself, but could be indicative that the company faces individualized revenue generating headwinds on top of general market malaise.

    Long puts.
    Reply
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