Greystone Capital recently released its Q4 2020 Investor Letter, a copy of which you can download here. Greystone is a privately held investment company. The investment firm seeks to simplify and add value by identifying opportunities in good and bad markets. During the fourth quarter of 2020, returns for separate accounts managed by Greystone Capital ranged from +28.0% to +57.2%. The median account return was +49.1%. You should check out Greystone Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q4 2020 Investor Letter, Greystone Capital highlighted a few stocks and Liberated Syndication Inc. (NYSE:LSYN) is one of them. Liberated Syndication Inc. (NYSE:LSYN) is a web hosting company. In the last three months, Liberated Syndication Inc. (NYSE:LSYN) stock gained 38.1% and on January 19th it had a closing price of $5.10. Here is what Greystone Capital said:
“Among the factors that drive business value over time, revenue growth, earnings growth and cash flow growth are at the top of the list. Businesses can achieve those things through organic or acquired growth, or they can achieve them through operational efficiency. While I prefer the former, I’m always interested in growing, cash flow generative businesses that appear to be under-earning based on unnecessarily elevated cost structures. This can be a low bar to step over to improve a businesses’ financials, especially when the majority of the costs take the form of elevated compensation to a former management team. I believe our new investment in podcast hosting platform Liberated Syndication is a good example of the above and how value can be created (or accelerated) by addressing some low-hanging fruit.
During the quarter I purchased shares of Libsyn in clients accounts as the opportunity appears to be ‘hiding in plain sight’. Libysn is a solid business that generates a lot of cash, has historically reported earnings well below what I believe to be the true earning power of the business, has cleaned up much of the ‘hair’ around the company with the involvement of an activist investor, and is now at what I believe to be an inflection point. With increased IR efforts in place to help communicate the story, a right-sizing of the cost structure, and continued market share gains as the leading podcast hosting platform in the industry, I believe the future potential of the business offers material upside over the next 12-18 months.
With that said, we were able to buy shares of this recurring revenue business, growing the top line 20%+, at a low double digit multiple of free cash flow. I’m confident we should do well if Libsyn just continues to execute as they have been, but with a new management team and multiple catalysts on the horizon, we could see the opportunity for higher revenue growth, margin expansion and multiple expansion moving forward. Although Libsyn doesn’t quite have the SaaS level of growth rates to garner say a 10x revenue multiple or 30x FCF multiple, the company trades at a discount to every relevant SaaS peer in addition to recent podcast industry M&A transactions that typically take place at 4.5-7x revenues. Also, unlike Anchor, Megaphone and Wondery, Libsyn is profitable, and highly cash generative.
In addition, investor excitement has been dampened given a lack of analyst coverage, no sell side reports, and limited IR efforts to communicate the story. Until recently, no conference calls or guidance was given by the old management team, and there is an incredibly frustrated shareholder base despite the stock doing well during the past five years. Despite management’s past mis-steps or lack of effort, I’d argue that the business performance and share price appreciation is reflective of LSYN’s business quality and strength of their competitive positioning. This should bode well for future results as a new – and hopefully better – management team takes aim at growing shareholder value. Over the next year or so, as one-time elevated costs roll off the income statement, a new CEO is put in place and the company has the option to plow free cash flow into growing their core podcast hosting business, I expect shares to re-rate higher with the potential to compound in value over the next several years.
I don’t believe we paid a high price for our shares or the future growth potential of the business, especially if we can realize any uptick in ad revenue (something recent M&A deals value highly) if LSYN can figure out how to scale their advertising platform. In addition, there are incentivized parties who have done a lot of work to right the ship here, and who own a lot of equity wanting to see a good outcome for the business. The major risk is that we are at ‘peak podcasting’ with growth set to slow over the next few years, and bigger more powerful platforms like Spotify set to take much more share and become the host of choice for new producers. I believe risk is mitigated here with a sticky customer base which includes LIbsyn serving as the host to more top 400 podcasts than any other platform.
Finally, while Libsyn’s installed podcast base, net cash balance sheet, 80% gross profit margins and higher than necessary SG&A costs would provide plenty of strategic and financial value to an acquirer, absent M&A, this is a solid business that will continue to generate cash into the foreseeable future with the potential to reach $10mm+ in FCF in the next 12-18 months. With an enterprise value of around $95mm, 9.5x FCF is way too low for the industry leader, growing podcast revenue 20%+ with strong competitive positioning, high margins and a clean balance sheet.
For the sake of brevity, please refer to the longer more detailed writeup in the Appendices emailed to you, or on the blog at www.poundtherockinvesting.wordpress.com.”
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