Charlie Munger, Warren Buffett's business partner, has condemned drugs, liquor, and leverage as humanity's three biggest downfalls. The first two are your own responsibility, but if you're invested -- or are thinking about investing -- in the media industry, you should know which companies in the space are the deepest in debt.
Leverage is not inherently bad for a company. A fast-growing company can intelligently employ debt to exploit its market opportunity. At low interest rates, debt can fund shrewd strategic acquisitions. Since it's generally cheaper than equity, debt can also lower a company's cost of capital.
But too often, companies end up abusing debt -- and as Munger reminds us, excessive leverage can lead to ruin. Let's examine a few of the most heavily indebted media companies.
|
Company |
Total Debt/Capital |
Interest Coverage |
|---|---|---|
|
Cumulus Media |
233.5% |
2.1 |
|
Playboy Enterprises |
202.3% |
0.5 |
|
Cablevision Systems |
193.6% |
2.0 |
|
LIN TV |
129.6% |
1.9 |
|
DISH Network |
127.8% |
4.5 |
First, all five of these companies have massive debt-to-capital ratios, each with well over 100% of their capital in debt. This implies that that these companies have negative equity. In other words, if they were forced to liquidate all their assets at book value prices, they would not take in enough cash to pay off their debts.
Likewise, with the exception of DISH Network, these companies have very low interest coverage ratios. With all the debt on each of their books, we can understand why they are using so much of their operating income simply to make interest payments. Note that Playboy's interest coverage ratio is less than one -- the company isn't even making enough money to pay its interest, which jibes with the recent news that the company is being taken private.
Just as all of these stocks is heavily indebted, they are also all pricey. The stock sporting the lowest enterprise-to-EBITDA multiple is LIN TV, and its multiple is still at 8.0 times -- not exactly cheap. The combination of high leverage and rich valuations can be a deadly one. Investors in any of these five media companies need to do their homework carefully.
For an easy way to stay current on any of these stocks, add them to My Watchlist:
- Add Cumulus Media to My Watchlist.
- Add Playboy Enterprises to My Watchlist.
- Add Cablevision Systems to My Watchlist.
- Add LIN TV to My Watchlist.
- Add DISH Network to My Watchlist.
