Leading multimedia company Salem Media Group inc. (SALM - Get Rating) in Camarillo, Calif., specializes in Christian and conservative content, with media properties that comprise radio, digital media, and book and newsletter publishing. In addition, the company issues digital newsletters with market research and non-individualized investing recommendations.

On the heels of former President Donald Trump’s announcement that he proposes to build a new social media platform called Truth Social, SALM’s stock has surged 113.7% in price over the last three months and 42.7% over the past month. Dr. Sebastian Gorka, one of SALM’s former network hosts, was appointed to President Trump’s National Security Education Board last year. Given the company’s ties with the former President, the stock witnessed a tidal wave of bullishness.

However, we think the company’s poor profitability and financial instability could impact the stock’s momentum in the near term.

Here’s what could shape SALM’s performance in the near term:

Debt Refinancing

Last month, SALM completed its refinancing of $112.8 million of senior secured notes due 2024 by exchanging them for $114.7 of newly issued 7.125% senior secured notes due 2028. However, the refinancing underscores the company’s inadequate cash flow generation capabilities to repay or repurchase the 2024 notes.

Poor Profitability

SALM’s 2.5% trailing-12-months net income margin is 58.9% lower than the 6.1% industry average. Also, its 3.5% and 9.57% respective ROC and EBIT margins are lower than their 4.5% and 10.95% industry averages. Furthermore, its $14.08 million trailing-12-months cash from operations is 96.5% lower than the $389.60 million industry average.

Discounted Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 10.68x, which is 45.8% lower than the 19.72x industry average. Also, its 0.51x forward Price/Sales multiple is 70.6% lower than the 1.72x industry average. Moreover, SALM’s 1.54x forward EV/Sales  is 40.6% lower than the 2.6x industry average.

The stock’s 11.28x forward EV/EBITDA multiple is 13.2% lower than the 10.96x industry average.

POWR Ratings Reflect Uncertainty

SALM has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SALM has a D grade for Quality. This is justified given the company’s poor profitability.

The stock also has a C grade for Stability. The stock’s 1.33 beta is consistent with the Stability grade.

Of the six stocks in the A-rated Entertainment – Radio industry, SALM is ranked #3.

Beyond what I’ve stated above, one can view SALM ratings for Growth, Value, Momentum, and Sentiment here.

Bottom Line

SALM’s poor profitability poses a threat to the stocks’ future price performance. Furthermore, because of the company’s insufficient cash flow generating capabilities, SALM’s current price rally, which is based solely on SALM’s ties with former President Trump and his announcement regarding a new social media platform, may not be sustainable. So, we think investors should wait for some improvement in company-wide prospects before investing in the stock.

How Does Salem Media Group Inc. (SALM) Stack Up Against its Peers?

While SALM has an overall C rating, one might want to consider its industry peer, Townsquare Media Inc. (TSQ - Get Rating), which has an overall A (Strong Buy) rating.

SALM shares fell $0.12 (-2.74%) in premarket trading Tuesday. Year-to-date, SALM has gained 313.46%, versus a 23.47% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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