Radio in need of new frequency

CBS' Mason targets early political ad amid weak sector outlook

CBS Radio CEO Dan Mason last week called on his industry to tell its story better to potential advertisers and investors. The executive received help from a research firm that predicted healthier radio ad growth in the coming years after what looks like a 2007 decline because of a sluggish second half.

SNL Kagan predicts that U.S. radio advertising sales -- excluding nonspot sales -- will drop below $20 billion this year after hitting $20.1 billion last year. However, after that, revenue should grow 3.2% annually to $28.7 billion in 2016, the group said.

Recent data and analyst comments also suggest a down year in 2007, and many sector stocks are near 52-week lows.

The Radio Advertising Bureau reported unchanged first-half 2007 radio revenue at about $10.4 billion. However, radio advertising declined 1% year-over-year each in July and August before slumping 7% in September.

It is no wonder then that Wachovia analyst Marcy Ryvicker has predicted a 1.7% radio ad decline for the current year.

Helping rectify this year's weakness will be rising Internet revenue and the further adoption of HD radio, which allows companies to split single channels into multiple ones, presumably multiplying the amount of advertising time available for sale.

Mason also said he will help radio's cause, and particularly CBS Radio's cause, by being more aggressive in selling political advertising ahead of 2008's U.S. presidential election. He hopes his radio competitors will do likewise, thus boosting the industry's fortunes and not just those of CBS Radio.

Mason's boss, CBS Corp. president and CEO Leslie Moonves, also said this month that he is "for the first time in a while, guardedly optimistic about the potential for growth in '08 for the radio business" (HR 12/5).

The SNL Kagan study also indicates that merger-and-acquisition activity has been relatively soft lately in the radio space, though that also is likely to rebound.

Through September, $3.52 billion in radio properties changed hands at an average of 12.1 times cash-flow multiple, according to the study.

"The operators and financial community will continue to invest and support radio going forward, because radio still turns out cash," SNL Kagan senior analyst Robin Flynn said. "Many ad dollars are migrating to the Internet, but radio is working to get a piece of that pie. While radio is not media's highest-growth industry, it still enjoys media-leading cash flow margins."

Wall Street analysts, though, have mixed feelings about the radio industry, especially amid recent talk of a possible U.S. recession.

Leland Westerfield of BMO Capital Markets continues to rate the radio sector at "underperform," and he has done so for the past three years. He predicts that radio trading multiples -- on the basis of earnings before interest, taxes, depreciation and amortization -- will contract 15% to 7.5.

He does, however, rate Salem Communications an "outperform" with a price target of $10, which gives the stock some upside given that it closed down 3.2% on Tuesday at $6.72 after hitting a 52-week low of $6.62. Salem focuses on Christian music and conservative talk radio.

Similarly, Banc of America analyst Jonathan Jacoby is "neutral" on most radio firms, though he is bullish on Radio One, which focuses on urban stations, and on industry giant Clear Channel Communications, which is still in the process of being acquired by private-equity groups.

Jacoby is most bearish on Sirius Satellite Radio, which is still trying to merge with XM Satellite Radio.

Radio One, once all announced transactions have closed, will own or operate 54 radio stations that focus on the black and urban markets. Among the catalysts Jacoby sees for the stock is a growing business in the Los Angeles market and the company's transition from a radio company to a broader-based media company. Along those lines, Radio One owns Magazine One, Reach Media and an interest in TV One.

Jacoby has a $6 target on Radio One, whose shares closed at just $2.26, down 4.6%.

As for Clear Channel, which is being bought by Bain Capital Partners and Thomas H. Lee Partners, Jacoby has a $42 price target, better than the about $39.20 a share that the private-equity firms are paying for the company. Shares closed down 1.1% on Tuesday at $34.94.

While observers are skeptical the acquisition will close, Jacoby sees it happening early next year. He wrote, though, that, "even if the deal busts, shareholders could pressure Clear Channel to increase leverage and sell of noncore assets to boost the value of the stock." Such moves could add an estimated $4 of value, he estimated.