What's Plaguing Radio? (CDL,ETM,CXR)

By Dean Lundell | August 10, 2007 AAA

One look at the performance of radio network shares will show you that the radio broadcasting business is in trouble. Audiences are shrinking and advertising dollars will soon follow.

The only company doing well is Clear Channel Communications (NYSE:CCU). The 800 pound gorilla of the radio business is more than ten-times the size of its nearest competitor and has a market capitalization of almost $17.5 billion and revenue approaching $7.3 billion. Clear Channel is thriving, but the radio business as a whole is suffering. We're going to be looking at the three largest broadcasters after CCU to identify the patterns that plague this business.

Citadel Gets 'Disneyfied'

Citadel Broadcasting (NYSE:CDL), with a market capitalization of just over $1.1 billion and sales of $461 million, is in the process of acquiring 22 large-market stations from Disney (NYSE:DIS). This is interesting because CDL only competed in mid-sized markets before the move. Citadel is also acquiring the ABC Radio Network as well. CDL does not have an enviable record when it comes to making acquisitions. The debt load it's going to assume is considerable and couldn't come at a worse time with the credit markets in disarray.

The company's pre-acquisition business consists of roughly 200 stations in close to 50 mid-sized markets. Add the 22 Disney stations and the ABC ones, and citadel could have quite an operation - if it can pull it off. One of the aspects CDL has to be banking on is that Disney never put much credit in or paid attention to its radio stations. Perhaps CDL thinks it can exploit this prior neglect.

CDL's strategy is to form clusters of stations but treat each station as a separate entity, thereby, fostering entrepreneurial spirit while taking advantage of economies of scale and exploiting cost efficiencies by using a common infrastructure.

Commercial Overload
Entercom Communications (NYSE:ETM) has more than 100 stations and is the fourth largest radio station operator in the United States. ETM's strategy is to encourage listener loyalty via a brand image.

Entercom faces stiff competition in its markets and is extremely dependent on local advertisers in those markets. With a declining listener base due to an excessive number of commercials, ETM's prospects seem limited.

The company's financials are going the wrong way. Its revenue has averaged a 5.8% growth over the last five years, 3.2% during the prior three, and last year grew at 1.8%. Its growth in earnings has gone from a 25% five year average, to -5% over the last three. Last year came in at a negative 30%. Its return on equity is -1.5%. Despite its lack luster financial performance, ETM manages to pay a fairly decent dividend and engages in share repurchases from time to time but clearly ETM has to find some answers. (To get started on your own evaluation, see the Fundamental Analysis Tutorial.)

Different Station - Same Message
Cox Radio (NYSE:CXR) has a market capitalization of more than $1.2 billion and revenue of about $440 million. It faces the same set of disappointing demographics as these other stations. Cox Radio's majority owner, Cox Enterprises, is trying to take its cable subsidiary private and shareholders can always hope it does the same with Cox Radio.

The financial performance of CXR is fairly dismal. Its growth in revenue has gone from averaging 2.2% over the last five years to 1.1% for the last three to 0.6% last year. Again, the wrong direction.

CXR operates 79 stations in 18 markets. In most of those markets CXR operates a cluster of multiple stations. Cox, too, is hoping to use scale advantages to its benefit. The company does enjoy a somewhat healthy cash-flow and uses that to pay down debt and repurchase shares from time to time.

The Incredible Shrinking Audience
Radio broadcasters share one fundamental problem: There are too many alternatives. Increasing competition from outlets such as satellite radio, iPods and MP3 players have all combined to make life more difficult for radio broadcasters. Throw in an increasing number of commercials and you've only given your audience more reason to leave, taking your advertising revenue with them. Also, it is interesting to note that Clear Channel Communications is trying to sell 400 of its stations. Stay tuned.

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