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Debt Reduction And 2024 ‘Inflection Year’ Have Investment Firm Bullish On iHeart.

B. Riley Securities is advising investors to “tune out the pessimism” baked into iHeartMedia’s stock price and focus on its “aggressive debt repurchase activity.” The Wall Street investment firm has reiterated its “Buy” rating on the stock with a $22 price target.

In a report to clients, B. Riley Securities analyst Daniel Day says he anticipates iHeart to announce it has used nearly all of its fourth quarter $200 million in free cash flow to buy back bonds at a discount. Day says this announcement will likely happen during the company’s fourth quarter 2022 earnings call in late February. Given iHeart’s current market cap of $1 billion, removing $200 million in debt from the balance sheet “should be 20% accretive to the equity,” Day says. He adds: “We would expect a positive share price reaction to such aggressive reported de-leveraging in such a short period of time.”

Believing that “the sluggish ad spend environment” will last longer than previously expected, B. Riley is trimming its 2023 earnings estimate for iHeart from $950 million to $912 million. Yet the firm still sees iHeart generating more than $300 million in cash flow in 2023 with most of that used for paying down even more debt. B. Riley also notes that its earnings estimate of $912 million for iHeart this year is at the high end of the current range of estimates. But those estimates are “too pessimistic,” Day argues, because they don’t accurately account for the impact of iHeart’s recent cost-reduction efforts.

Shares of “IHRT” have been trading at or around 52-week lows as some investors worry the company’s de-leveraging and capital returns timeline will be pushed out to 2024 and beyond. But B. Riley’s Day says he sees potential for a share repurchase announcement by the end of 2023.

By mid- or late- 2023, “management will begin looking forward to what is likely to be an inflection year in '24,” Day writes in the note to clients. “With a combination of only a modest recovery in core broadcast radio, a presidential election year that we expect to break prior records for political ad spend, continued digital/podcast growth, cost reductions, and de-leveraging efforts that reduce interest expense,” the investment firm is calling for iHeart to produce $1.22 billion in earnings in 2024, far higher than the current consensus of $1.07 billion. That will convert into $550 million to $600 million in free cash flow next year, according to B. Riley’s calculations. And with 2024 likely to be an inflection year for iHeart, the firm has a $22 price target on shares of “IHRT” and says investors should buy the stock soon since the company is likely to shift “to a more flexible capital allocation approach that includes a share repurchase component” if its stock price hasn’t materially risen by the back half of this year.

Meanwhile, Barclays Research said in a report Tuesday that the overall advertising outlook “appears to be getting worse based on commentary from most ad-exposed media companies due to the general economic backdrop.” But it may be more a matter of perception vs. reality. “Most of the pullback in ad spending thus far in the US appears to be driven more by companies trying to anticipate economic headwinds rather than an actual manifestation of growth slowdown,” Barclays says.

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