With radio’s second quarter earnings season starting next week, B Riley Securities is out with a financial preview of the two radio companies it covers: iHeartMedia and Cumulus Media. The investment firm forecasts the sluggish national ad revenue that has burdened the industry is about to turn the corner and show some growth.
“We believe there’s an increasing likelihood that national brands start spending more aggressively on advertising in [the second half of 2023, especially in fourth quarter] after holding back budgets earlier this year amid fears of a potentially severe U.S. recession ahead,” B Riley Securities analyst Daniel Day says in an industry update released Tuesday. Calling radio/digital audio “the quintessential brand-building reach medium for advertisers” and citing attractive profit margins for broadcast radio, Day sees “an opportunity for the first round of positive estimate revisions since early 2021.”
Although the typical broadcast radio station gets less than 20% of its revenue from national advertisers, both iHeart and Cumulus have sizable network radio and podcasting divisions that rely heavily on national ad dollars “that can be dialed up and down relatively quickly,” Day points out.
While national ad business has been rocky in recent quarters, radio’s primary revenue source of local ad spend “has been much steadier.” And while B Riley and others on Wall Street have worried a potentially worsening U.S. economy could cause local ad to spend to soften, putting a dent in revenue, those concerns have largely abated.
“With the U.S. economy proving more resilient than expected as inflationary pressures subside, the risk of a moderate-to-severe recession resulting in a meaningful downturn in local SMB ad spend appears to be waning, providing incremental confidence that downside risks to 2H23 estimates is limited,” Day concludes.
Debt Paydowns Will Cause Stock To Rise
The investor report is equally upbeat about prospects for iHeart and Cumulus to pare down debt. Both companies have opportunities to repurchase long-term bonds at “a sizable discount” compared to what is owed, Day predicts. That will speed up their ability to deleverage and put them on “solid footing to begin the process of pushing out debt maturities next year” as earnings and free cash flow improve.
Both iHeart and Cumulus have term loans coming due in 2026 and Day anticipates that once their debt loads have been “sufficiently pared down,” shares of each company’s stock will rise. That upbeat scenario has Day doubling his price target for shares of “CMLS” to $10 and tripling for “IHRT” to $13.
Drilling down into iHeart, Day sees the company doubling its free cash flow from 2023 to 2024 “driven by a rebound in brand advertising spend as well as a resurgence in presidential-year political revenue.” That, along with iHeart buying back more of its debt at “a sizable discount,” will put the company “in a favorable position” to begin pushing out its debt maturities, Day says. All of this, combined with improving sentiment about ad-supported businesses, will help drive iHeart’s stock price up, he predicts.
Go-Private Move In Future For Cumulus?
As for Cumulus, B Riley says buying back 1.7 million shares of its own stock at $3.25 a pop for less than $6 million hasn’t moved the needle on its stock price. The investment firm sees “little downside risk” to the second quarter revenue guidance Cumulus has issued and notes it has “considerable dry powder” to keep buying back bonds at a discount ahead of an expected uptick in earnings. Like iHeart, Cumulus will be in a good position to push out debt maturities, Day says.
But with little appetite among investors for micro-cap radio broadcasters like Cumulus, Day questions whether it makes sense for Cumulus to remain publicly traded and suggests it might exit the public markets down the road. “We believe it remains a possibility that Cumulus pursues a take-private transaction once ad spend recovers and the share price is more reflective of the underlying value of the business,” Day writes.
B Riley Securities stopped covering Audacy earlier this year, but the report notes the company’s challenges are related to an unhealthy capital structure rather than a sign of radio’s demise.