Wall Street Sounds Off on Radio Daze

For buy-and-hold investors, says Rosenstein, radio companies should be valued on the basis of their "considerable" free cash flow generation. "In the near term, however, forecasting even revenue growth from one month or quarter to the next has been challenging," he writes, "and there appears little reason to believe the market would accept the notion of stronger growth until some evidence of it emerges."

With investors more likely to judge radio companies by their current earnings before interest, taxes, depreciation and amortization, "it would be difficult to characterize valuations currently as truly compelling," Rosenstein writes.

Other problems are that there's too much advertising supply, and prices are eroding as the industry struggles to fill it, according to Rosenstein. Advertisers' perception of the return on investment in radio advertising has been declining in recent years, he says.

Banks Are Open

Also on Thursday, RBC Capital Markets analyst David Bank lowered his radio industry growth estimates from 5% to 3% for the current quarter, from 6.5% to 5% for the third quarter, and from 8% to 6% for the fourth.

Citing conversations over the past few days with sources involved in the national radio advertising business, Bank says that the pace of national advertising business written for June, July and August appears to be shrinking from last year's levels, not growing. Advertising among telecom, home improvement and, to a lesser extent, entertainment clients appears to be slowing, he says. And, surprisingly, the recent explosion of political advertising on TV "has not yet materially impacted the radio landscape," he writes.

Meanwhile, A.G. Edwards cut its estimates and price target on Emmis, Westwood One and Clear Channel, though analyst Michael Kupinski retained his buy ratings on those companies.

Like Bank, Kupinski also cited weakness in national advertising sales, which account for 20% of radio industry revenue.

Noting that radio stocks, down 19% since April, have significantly underperformed the general market indices, Kupinski says the reason is that companies aren't overdelivering on their guidance; rather, he says, they are coming in at the middle to low end of the ranges they are forecasting for their financial performance. "We believe that the radio stocks are near the bottom, however," he writes.

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