Strong Signals for a Radio Giant
By Howard Choe
After 18 months of an advertising recession, the tide could be turning for the media business. In 2002's first quarter, radio broadcasters and other media companies reported better-than-expected revenue and profit results, and described an improving operating environment for the industry. This should bode well for media stocks -- particularly broadcasting stocks -- as the pickup in advertising should trim inventories of unsold airtime and support higher prices for ads.
While the run-up in most broadcasting stocks in the beginning of the year has made valuations less attractive, a clear value remains in the shares of radio's largest player, Clear Channel (CCU ), which carry Standard & Poor's highest investment ranking, 5 STARS (buy).
Clear Channel is a diversified media company that reports results in three business segments: radio broadcasting (48% of 2001 revenues), outdoor advertising (25%), and live entertainment (24%).
With $890 million in radio broadcasting revenues in 2001 (capturing 20% of total U.S. radio ad dollars), Clear Channel is the industry leader. As of December 31, 2001, it owned, programmed, or sold airtime for 1,240 U.S. radio stations and a national radio network. According to the Arbitron fall 2001 ranking of U.S. markets, Clear Channel had 478 stations in the top 100 markets. In addition, it has equity interests in various domestic and international radio broadcasting companies.
Clear Channel also owns one of the largest national radio networks, based on a total audience of over 180 million weekly listeners. It syndicates talk programming featuring personalities such as Rush Limbaugh, Dr. Laura Schlessinger, and Jim Rome, as well as music programming with hosts such as Rick Dees and Casey Kasem.
With 28% of all U.S. outdoor advertising displays, Clear Channel is No. 2 in that business behind Viacom's Infinity Broadcasting. As of December, 2001, Clear Channel had total inventory of 156,623 domestic displays -- billboards of various sizes and ads on walls, in transit areas, and on street furniture, plus 573,416 international displays. The outdoor ad division operates in 46 domestic markets and over 65 countries.
Clear Channel won several key accounts in 2001, with displays for French Carrefour's 2,700 European hypermarkets and supermarkets, a 15-year contract to build more than 4,000 ad displays in Singapore, and expansion in Chile and Brazil.
Through the August, 2000, acquisition of SFX Entertainment, Clear Channel is one of the world's largest producers, promoters, and marketers of live entertainment. As of December 31, 2001, it owned or operated 145 live entertainment venues globally. In 2001, Clear Channel reached more than 66 million people and promoted or produced over 26,000 events, including live music, theatrical shows, and specialized sport events.
Some of 2001's notable productions were the Tony award-winning Broadway show The Producers and concerts including U2, Madonna, the Backstreet Boys, and N*SYNC. In addition, Clear Channel is a leading fully integrated sports-marketing and -management company, representing several hundred professional athletes.
With the industry up against tough comparisons in the first half of 2001, due to the higher level of dot-com advertising in 2000, the broadcasting group suffered a 7.4% decline in revenues. Clear Channel's distribution channels -- radio and outdoor billboards -- tend to hold up better in a weaker economy, but nevertheless suffered in 2001. At S&P, we believe that radio advertising in the first quarter of 2002 was down slightly, but the trends for April and May have turned positive. Advertisers are buying ads with longer time horizons in advance of price hikes and tightening inventory.
Following the lead of smaller and midsize markets, major radio markets are recovering strongly, which will be a big benefit for Clear Channel. We expect radio advertising will be up by mid-single digits in the second quarter and improve sequentially to end the year up around 4% to 5%.
In what was clearly one of the broadcasting industry's worst years in 2001, Clear Channel took steps to better position itself for an upturn. It reorganized its management and sales structure in a way to better match geographic and demographic needs of its advertising customers. Its multiple divisions consolidated operations and offices in a number of markets to maximize resources.
With a strong market presence and distribution capabilities, Clear Channel should now benefit greatly from a gradual advertising recovery. We at S&P expect its revenues to increase about 2% in 2002, vs. an 8% decline in 2001. Companies are increasing ad spending to support their products and services as the economy gradually recovers.
We expect Clear Channel's radio and entertainment divisions to boost revenues about 4% and 3%, respectively, with most of the gains in the second half. We forecast operating margins widening significantly, benefiting from better-utilized assets and cost efficiencies derived from acquisitions. With lower interest expense and depreciation charges, earnings per share should increase to 99 cents from 43 cents (pro forma for goodwill elimination) in 2001. Pro forma 2002 EBITDA (earnings before interest, taxes, depreciation, and amortization) should advance 13%, to $3.44 a share, from $3.04 in 2001.
Clear Channel is attractively valued on several fronts. Its stock recently traded at 19 times enterprise value (the market value of equity, plus long-term debt, minus cash) to EBITDA, which represents a 14% discount to its English-language broadcasting peers. By comparing that ratio against Clear Channel's expected long-term EBITDA growth rate, we get a multiple of 1.7 -- which represents a 19% discount to the average of its peer group.
And finally, based on our discounted cash-flow projections, S&P estimates that Clear Channel's intrinsic value is $60 to 62, significantly higher than its May 17, 2002, closing price of $52.54.
Analyst Choe follows broadcasting stocks for Standard & Poor's