While the static in radio stocks may eventually clear up, right now the sector's signal is starting to degrade.

On Thursday, Moody's cut Cox Radio's long-term debt to Baa2, saying even with a moderate rebound in advertising spending, the company's financial leverage was greater than levels consistent with a Baa3 rating.

"Radio advertising has been soft over the past year, and may remain weak," Moody's said in a statement. " The agency expects risk associated with radio industry consolidation trends will continue and that Cox will seek to continue to grow through acquisitions that may be debt financed."

Lately, Cox Radio was off $1.57, or 6.2%, to $23.69, while other radio stocks were also taking a hit. Clear Channel ( CCU - Get Report) -- the largest radio station operator -- was dropping $1.24, or 3.12%, to $38.46. ( TheStreet.com and Clear Channel Communications subsidiary Premiere Radio Networks share revenues produced by Jim Cramer's syndicated radio program.)

Emmis Communications ( EMMS - Get Report) was losing $1.54, or 6.42%, to $22.60, and Westwood One was shedding $1.36, or 3.9%, to $33.54.

Sound Salvation

"Market weakness may continue," said Jonathan Jacoby, an analyst at Suntrust Robinson Humphrey. "But eventually, the strength of radio industry fundamentals should drive the stocks higher."

The main advantage for radio is that it's a leader, in terms of advertising, coming out of a recession.

"As advertisers return to the marketplace, they look at radio as being cheap," said Jacoby, who forecasts that revenue from radio advertising in June will be up 4% to 5% from a year ago.

Radio has been immune to some of the advertising trouble other media experienced in the current economic downturn, because it relies on local advertising. An estimated 70% of radio ads come from local markets, while 30% of them come from national ones. Since local advertising never fell off a cliff, radio advertising -- which is cheaper than other media ads -- has been somewhat protected.

"Selectively, radio advertising is rebounding strongly, especially in large markets," said James Boyle, an analyst at Wachovia Securities. "Business is looking better month to month."


Still, there are obstacles to a recovery. On Thursday, Morgan Stanley lowered its recommendation for the auto sector, citing weakening consumer demand and the potential for flat to lower sales and production next year. The downgrade could impact radio negatively, since 8% of the industry's advertising comes from the auto business, with the Big Three automakers among the largest advertisers.

Another challenge facing the industry comes from Congress. Sen. Russ Feingold, D-Wis., has planned to introduce legislation in the coming weeks aimed at deconsolidating the radio industry. In 1996, the Telecommunications Act eliminated the national ownership limits for radio stations.

"This led to a number of national super radio station corporations, that now dominate the marketplace, and allegedly engage in anticompetitive business practices," Feingold has said.

Though the likelihood of new legislation is uncertain, the issue may give investors jitters short-term.

Aiden Day

Additionally, competition from satellite radio operators, such as XM Satellite Radio and Sirius Satellite Radio ( SIRI), which has been weak so far, could become stronger as subscriptions boost.

At the end of the first quarter, XM said it is on track to end the year with 350,000 subscribers, or four times the number it had then. With some equating the birth of satellite radio to the emergence of cable television, Clear Channel, for one, has not wasted time taking a minority stake XM Satellite Radio.

"It is something the radio industry is taking a look at," said Reed Bunzel, editor-in-chief of Radio Ink, a trade publication. "Subscriptions to XM Satellite Radio and Sirius are starting to pick up."