Radio stocks fall as ad revenue slows

With dotcoms pulling back, 20% gains may be history

By Elizabeth A. Rathbun -- Broadcasting & Cable, 10/9/2000

Radio companies have been socked by skidding valuations over the past six months, which could keep falling as revenue fails to reach record highs of a year ago. Their problem: They did too well when dotcoms were flying high. And now that Internet start-ups are sputtering, radio is suffering too.

Even traditional Wall Street darling Clear Channel Communications is not exempt from the current free fall. In hitting a 16-month high of $95.50 on Jan. 21, the company's market capitalization was $60.6 billion, according to Vinton Vickers, a media analyst with Bear, Stearns & Co.

Now, with its stock trading at about $69 per share, the nation's top radio group is valued at a bit more than half that: $33.2 billion. (Market cap is defined as a company's value based on the market price of its issued and outstanding common stock.)

On average, the value of publicly traded radio companies has dropped 50% so far this year, Vickers says. Among the other radio companies he analyzes, Hispanic Broadcasting, worth $7.5 billion on March 16, is now valued at about $2.8 billion. Entercom Communications was worth $3.3 billion on Feb. 10. It's currently down to $1.4 billion. Citadel Communications' market cap has dropped to $666 million from $2.5 billion earlier this year.

Infinity Broadcasting, the nation's No. 2 group, hasn't been devalued quite as much because it was merged into Viacom, Vickers says. It's now valued at $36.4 billion after peaking at $44.3 billion.

Radio executives are aghast. In the preceding year and a half, they enjoyed a run of expanding stock prices and favored initial and secondary public offerings.

But here's the irony: That run is exactly what's at the root of radio stocks' current "deceleration."

As the national economy has slowed and dotcom companies have been slapped by Wall Street, the unprecedented wave of spending on radio has waned. Subsequent lower revenue gains-while still strong-pale when compared to the record revenue a year earlier. And in focusing on that comparison, Wall Street is sending radio stocks tumbling (see chart).

"Why Wall Street is reacting is a mystery," says Jeffrey H. Smulyan, chairman of Emmis Communications and president of the board of the Radio Advertising Bureau. "This is the same industry growth that spurred 25-times cash-flow valuations two years ago."

Radio secured 20%-plus increases in local and national ad spending in the first five months of this year. However, total industry revenue plunged to 14% this past June and 11% this past July (the most recent month available) compared with the same months in 1999, according to the RAB (see chart).

Vickers expects growth in the high single digits or low double digits in 2001. That's "still very attractive," he says.

"There is not a major problem with the radio industry," says RAB President Gary Fries. As he told industry members gathered for the NAB Radio Show late last month in San Francisco, "A few years ago, we were up 12%, and we thought that was great. Then we had a phenomenon where we started hitting 20% increases. Now, it's back to reality," or monthly revenue growth in the 13% to14% range.

Fries downplays declines in dotcom spending, which he repeatedly asserts was a minor phenomenon. It only accounted for 2% to 3% of radio's total revenue at its high point last year, he maintains.

However, dotcom dollars have declined more than expected, says James B. Boyle, senior vice president/director for First Union Capital Markets. And that has hit radio's top markets extra hard, because they collect a disproportionately large share of dotcom dollars. (The top 15 markets account for about 30% of overall radio revenue, according to Boyle.) "On Wall Street, you're not allowed to fall back," Boyle notes.

Cautioning against "panic," Fries cites four short-term factors that have been holding down revenue:

• The upcoming presidential election and the recently concluded Summer Olympics, which sidelined some advertisers who chose not to fight for consumers' attention;

• A lackluster summer movie season without blockbusters to advertise;

• The now 5-month-old strike by the members of the Screen Actors Guild and American Federation of Television and Radio Artists, which has halted production of new ad campaigns, and

• "A soft agricultural market" after three consecutive summer months of price declines for farm products. Advertisers spend less on consumers who themselves have less to spend, Fries explains.

Analysts and industry executives also cite the economic slowdown encouraged by Federal Reserve Chairman Alan Greenspan. Radio, with its reliance on advertising, is one of the first barometers of a slowing economy, Smulyan says.

The last half of the year "is probably not going to be as brisk as the first half," says Citadel Chairman Lawrence R. Wilson. But Wall Street is overreacting. "We've always had good times and bad times and from week to week you can't get too excited."