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May 26, 2006

Satellite Radio Stocks Crumble But Don't Buy Terrestrial

I am not a fan of the satellite radio stocks although I am an extremely happy and enthusiastic Sirius subscriber. I never listen to CDs or the radio in my car since getting Sirius two years ago.

My issue with the satellite radio stocks has been valuation relative to the cost of obtaining and maintaining subscribers over the long-term. Despite the recent shortfall at XM, I think subscriber growth will meet long-term goals at near current monthly pricing. Satellite raid is a far superior product to terrestrial radio and there is no chance that terrestrial can fight back because their music stations will always be an ad-supported business. Listen to whatever music genre you prefer on Sirius or XM for an hour or two and you will never want to hear a commercial on your favorite FM radio station again.

As for the terrestrial radio stocks, I don’t think they are a good investment....

Public market values are still at a big premium to other media sectors and private market activity has not yet been robust. Emmis is attempting to go private but there is no big premium there to public values and the stock did run to a big premium to the buyout price. This indicates to me that there isn’t a lot of money, strategic or financial, in the wings waiting to flood the sector with buyout deals.

It is easy to see why. Fundamentals are under severe long-term pressure and only a big rebound in traditional advertising growth rates could help. Like newspapers, radio is losing market share of advertising dollars as advertisers move money to the internet. As marginal dollars continue to drift away from traditional media, radio will find it tough to produce anything better than low single-digit revenue growth. Facing the need to invest intheir stations to face the compeititve threat of iPods, Sirius, and XM, this leaves the industry without operating leverage and stick in a low growth environment at best. If that is the case I see no reason to pay 9-11 times EBITDA for radio when newspapers trade at 8 times EBITDA, diversified media trades at 8-9 times EBITDA, and cable trades at 6-7 times EBITDA. The only thing radio offers relative to other media is extremely capital intensity which helps free cash flow and supports buyout speculation.

An oversold rally from a horribly acting group is possible but I wouldn’t look at terrestrial radio for long-term capital gains.

Posted by Steve Birenberg at May 26, 2006 11:26 AM in Radio