Radio Stocks Still Making Waves (CCU, CDL)

By Stephen Brown | August 10, 2006 AAA

Video didn't kill the radio star, nor did it kill radio, though radio might appear prostrate given the industry's obdurate funk. The heavyweights – Clear Channel Communications (CCU), Citadel Broadcasting (CDL), Cox Radio (CXR), Cumulus Media (CMLS), Emmis Communications (EMMS), and Salem Communications (SALM) – have all been buried, or at least you'd think so based on year-to-date performance.

Two primary worries troubling the punditry are competition for advertising dollars and revenue growth. The former is fierce, the latter erratic. But like Mark Twain, the industry's demise has been greatly exaggerated. Despite the onslaught of subscription radio, internet media and personal music devices, radio continues to expand its $20 billion advertising base.

My two favorite companies from the aforementioned heavyweights are Clear Channel Communications and Citadel Broadcasting. Clear Channel is the industry champion, operating nearly 1,200 radio stations across the United States and accounting for nearly 10% of the industry's revenues.

But props for Clear Channel have been hard to come by because of the company's proclivity to miss earnings estimates. On that front, Clear Channel's second quarter 2006 earnings fell 10%, falling short of analysts' estimates. But in media, cash flow is king and Clear Channel reported consolidated EBITDA of $649 million, a 4.6% increase from the previous year.

Moreover, Clear Channel is willing to use its cash to enrich shareholders, returning nearly $1.6 billion through recurring (and rising) dividends, share buybacks and special dividends. Given its ability to generate cash and its willingness to distribute it to shareholders, Clear Channel's stock looks appealing with its current 19% discount to its 52-week high and 2.6% yield.

My other favorite radio broadcaster, Citadel Broadcasting, is the fifth largest in the United States. The company operates 163 FM and 58 AM radio stations in 49 markets in 24 states.

Expect that footprint to swell. In February, Citadel agreed to combine The Walt Disney Company's (DIS) ABC Radio – 22 radio stations and the ABC Radio Network – with its own. The holders of Disney would own approximately 52% of the common stock of the combined entity, which will fly under the Citadel Communications moniker.

Recent press reports have questioned whether the proposed merger will conclude under the original terms. Since the merger announcement, Citadel's stock has declined 33% to trade through a $250 million deal collar. Nevertheless, industry insiders expect the deal to be consummated; I expect the deal to be completed by year's end.

Citadel, like Clear Channel, has seen its stock squeezed because it missed analysts' estimates. The company reported a second quarter loss of $74.8 million thanks to a $149.8 million write-off to reduce goodwill and intangible assets. Lost on investors was Citadel's positive free cash flow of $38 million, which, like Clear Channel, was used to enrich shareholders.

To that end, Citadel has purchased 24.1 million shares and has paid cumulative dividends of $62.2 million. The stock is currently yielding 8.7% (which is high but appears safe given the recently announced $0.18 quarterly dividend payable Oct. 20) and is trading at a 39% discount to its 52-week high.

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