Pay no attention to the management.
That might be the best advice for shareholders in
, the nation's largest radio company. They have watched their stock drop 15% in the past week as the company has tried to get its story straight with analysts, guiding sell-siders toward lower bottom-line estimates. The culprits include higher capital expenses and administrative and interest costs.
Yet shareholders who focus too closely on the bad news risk losing sight of the fundamentals of the radio business, which are superb -- and getting better. While the average public company struggles to post single-digit revenue and earnings growth for 1999, radio stations are demonstrating enormous pricing power.
Over the past decade, radio companies, led by Chancellor and
Clear Channel Communications
, have bought hundreds of stations nationwide, grabbing clusters of six or more stations in major cities.
Now they've begun to use their newfound leverage over advertisers. Chancellor reported Thursday that its 1998 radio station revenue increased 18% compared to 1997, while
, a smaller operator, said Tuesday that its revenue was up 13% for 1998. (Both figures factor out the impact of acquisitions; the true revenue increases were much higher.)
And the trend has continued into 1999. So far this year, the industry has raised rates 10% or more across the board from their levels last year. Yet these price hikes haven't driven advertisers away. In fact, many stations have actually
boosted the number of ads they play, further increasing revenues.
"Most of radio is seeing strong first-quarter increases of over 10% to 12%," says one industry executive.
Deborah Jacobson, a Chancellor senior vice president, says her company is exceeding that. "On a same-station basis, we're seeing growth of much higher than 10%. ... Radio's getting the benefit of consolidation."
And most of that money goes straight to the bottom line. Aside from commissions for salespeople, almost no new costs are associated with new ad revenue.
"Every radio company has smiles on their faces," says Mark Greenberg, manager of the
Invesco Strategic Leisure fund. Greenberg, who regularly checks ad sales with media buyers, says, "I don't know of a single company in the United States that's telling me they're cutting back their commitment to radio."
With more than 450 stations nationally, pending acquisitions, Chancellor might appear well positioned to capitalize on this trend. Unfortunately for shareholders, the company has been dribbling away Wall Street's trust ever since Chief Executive Officer Scott Ginsburg quit last year after a power struggle with Chairman Tom Hicks, who controls Chancellor through his
Hicks Muse Tate & Furst
venture capital firm. Another well-respected Chancellor executive, Chief Financial Officer Matthew Devine, quit in January, reportedly after clashing with Jeffrey Marcus, Ginsburg's replacement as CEO.
Then, three weeks ago, Chancellor announced that it would "explore strategic alternatives," including a potential sale of the company. The news sent Chancellor stock soaring from 45 to near 60, but some investors quietly wondered whether the company wouldn't be better off consolidating the $8 billion in acquisitions it's made in the past two years before putting itself up for sale.
Matters came to a head this week, after the company told analysts that despite its top-line strength, it wouldn't meet their cash-flow estimates. (Chancellor's acquisition binge causes it to have extraordinarily high noncash amortization charges, which distort its reported net income. Most analysts agree that after-tax cash flow, which roughly equals operating income minus interest and tax charges, and free cash flow, which equals after-tax cash flow minus capital expenditures, offer better measures of the company's true profitability.)
Behind the shortfall: Higher-than-expected capital expenses and corporate overhead and slightly higher interest expense. The biggest problem will be capital expenses, which the company now expects will come in at $140 million this year, not the $70 million analysts expected. But much of the additional expense will go to building new outdoor billboards (another Chancellor business), which bulls claim should pay off almost immediately.
Jacobson, the Chancellor executive, emphasizes that the company doesn't expect its growth to slow. "The guidance that we are giving to the Street is not to take down the operating performance," she says. Analysts are projecting the company will have roughly $2.5 billion in revenue, $1.2 billion in EBITDA and $600 million of free cash flow for 1999.
Chancellor's $7 billion debt burden also concerns some analysts, who wonder what the company will do if the economy turns south. But for now, billings are increasing at a double-digit rate.
As are the worries about Chancellor's management. Maybe Marcus, Hicks and Chief Operating Officer Jimmy DiCastro aren't getting along. (Chancellor declined to comment.) And maybe the company's guidance has left something to be desired. But on an enterprise value to cash flow basis (debt plus equity), Chancellor is about one-third cheaper than both Clear Channel and
-- and its billings appear to be rising just as fast. So who cares?