On Monday, SEC filings revealed that three executives had bought an enormous amount of iHeartMedia (NASDAQ:IHRT) stock. Together, the firm’s CEO, CFO and chief accounting officer snapped up over 190,000 shares worth $1.05 million.
It’s a fascinating turn of events. iHeartMedia’s stock is down almost 75% since 2022, and shares trade as a stub on top of a massive debt pile. Any good news could send shares up 100%… 200%… 500% or more.
I’ve long noted that CEO and CFO buying is a strong positive signal to future gains. And with multiple iHeartRadio executives suddenly jumping in, these insiders are signalling that they know something that we don’t.
The Insider Track Strategy
In 2021, I summarized this type of trading as the Insider Track Strategy. Heavy insider buying (which is legal if you disclose it to the SEC) is a bullish indicator, since insiders generally have superior knowledge about their companies. The average company bought by insiders will outperform the market anywhere from 6%-15% per year.
The effect is particularly noteworthy among biotech, mining firms and highly indebted companies, where a single piece of good news can send shares soaring. In November 2021, I highlighted insider buying at biotech Longeveron (NASDAQ:LGVN) — right before the company made a surprise announcement of a fast-track FDA approval for one of its drugs. (Shares would rise 10X in the ensuing mania). And in October 2022, I used these findings to identify 15 stocks to bet on despite the bear market. The 15 stocks have since returned 9%, outpacing both the high-growth Nasdaq-100 (-1.6%) and the more conservative Dow Jones Industrial Average (-1.6%). Among picks with “cluster buying” — the case where multiple executives buy shares — the return was a stunning 17%.
Today, iHeartMedia lands in that latter category of “cluster buying.”
What Do Insiders Know That We Don’t?
There are three potential reasons why insiders at iHeartMedia might have bought shares. All are net-positive for future returns.
- Low Share Price. iHeartMedia hasn’t traded this cheaply since October 2022 on a price-to-sales (P/S) basis. A return to a more “average” valuation will give shares a 43% upside if you ignore debt, or a 21% upside if you include it.
- Recapitalization. Cluster buying at indebted firms is also a potential sign that the company could be in talks to refinance its debts. Tesla’s (NASDAQ:TSLA) Elon Musk controversially bought millions of his company’s shares just as it was finalizing a new bond issuance.
- Buyout Talks. Finally, iHeartMedia’s cheap share price makes it a tempting buyout target. Companies like Spotify (NYSE:SPOT) and Apple (NASDAQ:AAPL) would benefit from iHeartMedia’s programming. At the same time, firms like Microsoft (NASDAQ:MSFT) or Netflix (NASDAQ:NFLX) could use the acquisition to enter the podcast market.
The $500,000 purchase by CFO Richard Bressler is particularly noteworthy. Unlike the other two executives, Mr. Bressler rarely buys shares of his firm. His only other purchase — which happened in November 2021 — would eventually precede a stunning 48% earnings beat the next quarter.
What Is iHeartMedia Worth?
iHeartMedia’s shares trade at a low $5 for several good reasons.
First, the company’s debts have sunk the firm before. In 2018, iHeartMedia was forced into bankruptcy after its $20 billion debt load proved too great. The firm would shed almost $15 billion in debt and essentially wipe out shareholders. More recently, rising interest rates have threatened the company’s ability to refinance. The price of its 2027 bonds now trades at $83.75, down from $105 in 2021.
Second, the value of land-based radio stations has plummeted as online competitors have grown. The No. 2 and No. 3 players, Audacy (NYSE:AUD) and Cumulus Media (NASDAQ:CMLS), trade as penny stocks with sub-$100 million valuations.
And third, political ad spending won’t return until 2024. Analysts predict IHRT will show a 3.5% revenue decline this year before sales ramp back up the following election year.
But iHeartMedia’s executive team might still have good reason to buy shares now. The company generates over $1 billion annually from online audio — over a third of which comes from podcasting. It’s a business that competitor Spotify has splashed out over $500 million in acquisitions to gain a toehold. A competitor could reasonably absorb half of iHeartMedia’s debts to access that crown jewel.
The firm’s broadcast radio segment is also strangely profitable, thanks to the benefits of scale. iHeartMedia is over twice as large as No. 2 Audacy and generates a healthy 29.5% adjusted EBITDA margin on the business. (Spotify, by comparison, barely earns 25% gross margins).
Most importantly, iHeartMedia’s leveraged balance sheet makes it a potentially explosive play. A three-stage discounted cash flow (DCF) model shows that shares could be worth up to $52 if the company can maintain around $400 million – $500 million in free cash flow. Even reducing cash flow figures to $300 million leaves a justified value of $26.
Perhaps that’s the reason why iHeartMedia’s executives are suddenly jumping in. Markets are pricing the firm as if it will only generate $200 million of annual cash flow. And if the company’s management beats that figure by even a tiny amount, iHeartMedia will become yet another win for the Insider Track strategy.
On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.