2006 hard to beat for radio sector

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NEW YORK -- Shares of radio station groups have pushed higher as of late, but Wall Street analysts warn that the investor party should come to an end with the start of 2007 just around the corner.

Bear Stearns analyst Victor Miller in a recent research report downgraded his sector view from "overweight" to "market weight," arguing that 2006 will be "hard to replicate" for radio stocks.

He argued that many of the gains have been driven by buyout chatter, with Clear Channel Communications, which said Thursday it has agreed to a private equity deal to take it private, up 13.5% and Cox Radio up 21.1% for the year. "Univision announced its sale; Clear Channel and Clear Channel Outdoor are exploring 'strategic alternatives'; Emmis tried to take itself private; and many are convinced Cox Radio will go private at some point," Miller said in explaining the boom.

This means that most sector stocks have been exceeding the returns provided this year by the Dow Jones Industrials Index (+13%), the S&P 500 (+10.6%) and the Nasdaq (+7.8%).

"In general, broadcast stocks tend to outperform in political and Olympic 'even-numbered' years," Miller also warned. "This money will be of lesser scale in 2007, though 2007 may be the largest nonpolitical spending year in history."

Goldman Sachs analyst Mark Wienkes agreed in his latest reports. "Despite expected soft third-quarter results and continued weak trends cited by several operators, radio stocks have rallied on stronger fourth-quarter trends cited by select operators," he said. But strong political ad sales trends, easier comparisons and other one-time items are "masking the weak underlying trends for this group," he added.

Wienkes notes that "additional buyouts across the group remain unlikely, owing to a combination of minority-held super voting shares, high leverage and/or still-challenging fundamentals."

Even Spanish-language radio firms aren't safe. Miller Tabak + Co. analyst David Joyce this month downgraded shares of Spanish Broadcasting System from "buy" to "neutral," citing weaker-than-expected third-quarter trends and disappointing fourth-quarter guidance. He cut his price target on the stock by $1 to $5.50.

"Now that guidance for the core radio division for the fourth quarter is calling for a decrease whereas peers are expecting mid- to high-single-digits (growth), we believe SBSA stock will be in the penalty box for some time," Joyce said.
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