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February 27, 2006

Radio Industry Outlook Hurts Clear Channel

Clear Channel (CCU) shares have given back most the gains which followed the solid 1Q06 guidance the company provided with its 4Q05 earnings report. In my summary of the earnings, I said a brief rally in CCU shares could occur. I didn't think it would quite this brief. Three issues continue to trouble the shares. First, competing radio companies are consistently reporting weak pacings and guidance for 1Q06. Second, if you look at the details of CCU's 1Q06 commentary, despite the 6% gain in January radio pacings, February and March could be negative. Third, radio stocks are still at a significant premium to other traditional media sectors with no signs that the short or long term challenges the industry faces are moderating.

Since CCU reported, competitors Entercom (ETM), Cox Radio (CXR) and Radio One (ROIAK) have announced results. Each company reported subdued numbers for 4Q and provided worse than expected commentary on 1Q06 trends. As noted in the earnings coverage, last year CCU dramatically underperformed industry advertising trends by around 500 basis points as it cut back inventory and moved to 30 seconds spots in its "Less Is More" strategy. January pacings and 1Q guidance showed that LIM might be working as CCU is now outperforming the industry. At a minimum, the easy comps set up by implementation of LIM suggest CCU should easily outgrow the industry in 2006.

However, if the radio advertising growth takes another step down, CCU is unlikely to outperform enough to meet current estimates. I think this fear has led to the CCU pullback as competitors' results did not provide much confidence for the industry. CCU said its pacings in January were 6% yet only forecast a 2.9% gain in advertising for 1Q06. January is the smallest month in the quarter, although February could be negatively impacted the Olympics. Regardless, the much slower 1Q guidance compared to January results suggests that CCU is experiencing flat or even negative growth in pacings for February and March. This may still outperform the industry but it will likely not give the street much confidence in 2006 estimates.

All of this would be less concerning if radio shares were cheaper. However, the industry still trades at more than 10 times 2006 estimated EBITDA vs. less than 7 times for cable and less than 9 times for the entertainment conglomerates and newspapers. Radio does have a free cash flow advantage since there is virtually no capital spending required in the industry. However, investors are concerned about growth in traditional media and given the challenges poised by satellite radio, internet radio, and iPods, I don’t think the free cash flow advantage is enough to support a big multiple premium for radio. CCU trades at a discount to the radio group but not large enough to make it unusually attractive relative to other media stocks.

The bottom line is that with 4Q05 results and 1Q06 guidance in the mirror for the radio industry, I see no reason to be involved in CCU or other radio stocks.

Posted by Steve Birenberg at February 27, 2006 08:27 AM in CCU