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September 28, 2006

Nothing But Static in Radio Stocks

The New York Times and Goldman Sachs were both out recently with analysis of the radio industr. Commentary in both reports was generally negative, noting the lack of advertising growth and the loss of usage share to other media such as the Internet radio and iPods.

The Goldman Sachs report had some very interesting data. First, as noted elsewhere, Goldman points out that recent studies show that time spent listening to radio is falling at a 2% annual rate. This is an acceleration in the rate of loss from a decades long decline at a 0.20% rate. Interestingly, Goldman says that time spent listening in cars is up (primarily due to longer commutes), with all the loss coming from listening at home and at work. Both these areas are more accessible for iPods and Internet radio. Even worse for the radio industry, the bulk of the share loss is in the 12-17 and 18-34 demographics. Other trends noted by Goldman include news and talk gaining share at the expense of music stations and women more rapidly abandoning the medium than men.

Overall, this presents a bleak picture and clearly explains the significant declines in almost all radio stocks this year.....

Multiples have contracted and cash flow is barely growing. With younger listeners leading the exodus to iPods and Internet radio, there is reason to expect the market share loss is permanent and could accelerate. Furthermore, Apple Computer's (AAPL) deal to put fully integrated iPod docks in the bulk of the 2007 car models and continued subscriber gains for satellite radio could overwhelm the longer commute times.

As for the stocks, the negative fundamental trends are well known. Lots of assets are for sale, and there have been a few transactions at premiums to current public market values. It is possible the stocks will stabilize or even have a small bounce as sentiment is so negative. However, I think it would be tricky to play any radio stock from the long side against such weak long-term fundamentals. Further, the New York Times article speculates that Clear Channel (CCU) will be selling stations. This could lead to excess supply of stations for sale and remove any premium in private market values.

The bottom line is that radio stands with newspapers as having the worst fundamentals in traditional media. Everything gets cheap enough to warrant looking at from the long side, but with both groups looking at low single-digit revenue growth at best, there is no reason for anyone with a time horizon beyond a short-term trader to be long.

Posted by Steve Birenberg at September 28, 2006 01:13 PM in Radio