Friday, March 3, 2006

Radio Stocks Face Static

News Analysis
March 3, 2006

Business Week Online

Radio Stocks Face Static

Flat revenues and dwindling listeners are making investors tune out of radio companies. Can they make a comeback?

Talk about lousy reception. On Mar. 1, the share prices of the largest radio network, Westwood One (WON ), as well as the fifth-biggest radio broadcaster, Citadel Broadcasting (CDL ), scraped new 52-week lows following lackluster fourth-quarter profit reports. But earnings season alone didn't kill the radio stocks.

The same blues have been in heavy rotation all across the AM/FM dial. Industry revenue was flat in 2005, after rising a modest 2% in 2004, analysts say. "People who are more bullish on the radio stocks keep waiting for more revenue growth, and it just hasn't come along," says Morningstar analyst Michael Corty. Even radio giant Clear Channel (CCU ) ended the first two months of 2006 down 10.2%, despite an upside earnings surprise.

Howard Stern isn't the only person switching from traditional radio. Analysts say the medium faces growing competition for advertising dollars from cable television, newspapers, and the Internet. At the same time, audiences are tuning into satellite radio outfits such as Sirius (SIRI ) and XM (XMSR ), or becoming their own DJs with MP3 players like the ubiquitous Apple (AAPL ) iPod.

RISING COSTS.  Adult listenership eroded 11.3% from the fourth quarter of 2000 to the same period last year, according to ratings tracker Arbitron. "You'll see a slow, steady decline in radio listenership for the foreseeable future," says CIBC World Markets analyst Jason Helfstein, who covers Citadel.

Both Westwood One and Citadel will probably have to bolster their top lines before their stocks can come back from the bottom of the charts, analysts say. A challenging industry climate could make that an even tougher task.

Along with revenue concerns, New York-based Westwood One will also have to contend with rising costs. Managed by CBS (CBS) division CBS Radio, the company's expenses are expected to leap by double-digits in 2006, wrote Bear Stearns analyst Christopher Ensley in a research note. On Feb. 24, he cut the stock from peer perform to underperform.

COMMERCIAL BREAK.  The costs come as Westwood One invests in new programming, such as Olympics coverage and the replacements for morning shock-jock Stern. Syndicating new shows from Jim Cramer and Jay Severin should put further pressure on margins. "We're very focused on upgrading our programming," says company spokesman Andrew Zarif. He declined to comment on the stock price.

Still, Westwood One's investments might not pay off soon enough to suit some analysts. "I don't think there's anything in the landscape which suggests a wholesale change in fortunes here," says David Bank, a managing director who covers the stock at RBC Capital Markets. "The expenses related to programming investments are not really one-time issues. They're going to be with us a little bit."

Westwood One may see some good news from an industrywide push for shorter commercials, led by Clear Channel. Broadcasters are hoping advertisers pony up for ads that run just 10 to 30 seconds, instead of the usual minute. During a late February conference call, new Westwood One CEO Peter Kosann reportedly said short spots "bode well" for the network's traffic-report business.

PAYOLA INVESTIGATION.  While Westwood One must overcome slimming margins, Citadel's biggest hurdle is its own newfound girth. The mid-size company is set to become the third-largest radio group, if a recently inked deal for Disney (DIS ) unit ABC Radio goes through as planned. Citadel shares tumbled 4.5% on Feb. 7, a day after the $2.7 billion agreement was announced. A company spokeswoman did not return phone calls for comment.

Ultimately, the merger may do little to help Citadel's bottom line. Each company already runs a tight ship, analysts say, and their markets rarely overlap. "We see few areas of regional costs savings, and with a larger enterprise to manage, decreases in corporate overhead will also have a modest impact," says Maurice McKenzie, a vice-president who covers Citadel at Friedman Billings Ramsey.

Other risks could potentially do more damage to the stock. In February, 2005, Citadel received a subpoena from New York Attorney General Eliot Spitzer as part of his inquiry into radio pay-for-play practices, and the outcome is still unclear. Citadel has said it's cooperating fully with investigators.

RADIO REBOUND?  Buyout firm Forstmann Little owns a 62% stake in Citadel. A sale of all or some of those shares could cause investors to jockey out of the stock, driving prices down, McKenzie says.

More recently, Citadel said in a Feb. 27 regulatory filing that it has received a notice claiming its merger deal puts it into default on nearly a third of its debt. Citadel rebutted the charge, saying it plans to "vigorously defend itself."

For the long run, the fates of Westwood One and Citadel are tied to their industry. If radio companies find a way to raise revenues, either stock could perform a Mariah Carey-like comeback.

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