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Radio Q3 Preview: National Biz Stabilizes, Local Holds Up Well.


With third quarter earnings season just around the corner, B. Riley Securities is calling for national radio ad sales to stabilize after a rocky first half, and for local business to remain relatively strong through the third quarter. “Following advertising checks with companies and third-party sources, national advertising spend looks to be stabilizing after taking a meaningful leg down in the first half of the year while local ad spend has continued to hold up relatively well through 3Q,” B. Riley Securities analyst Daniel Day writes.


B. Riley’s radio outlook is based on the three radio companies it covers: iHeartMedia, Audacy and Cumulus Media.


In a report for clients Friday, B. Riley forecasts local ad spend to “soften later this year and into 2023 amidst a recessionary economic environment.” The firm is sticking with its ex-political broadcast radio estimates for iHeart and Cumulus while making “only modest revisions” for Audacy.


In what by all accounts will be a record midterm year for political advertising, the forecast calls for radio’s share of the election pie to “meaningfully exceed the 2018 baseline and approach the levels of the 2020 presidential election cycle.” True to form, most of that will come in the fourth quarter.


B. Riley’s outlook has some good news for iHeart. The investment firm is putting the company on its “25 Picks for 22” list. The thinking is there is “limited downside” to the audio giant’s fourth quarter guidance. And with shares of “IHRT” trading near the low prices reached earlier this year, B. Riley expects investors to “react positively” to iHeart de-leveraging its balance sheet in the second half after it reports Q3 financials in early November. “We believe now is the time for contrarian, value-oriented investors to accumulate shares in a stock that is beaten down and out of favor with a much stronger balance sheet position and longer-term growth outlook than is implied by the current stock price,” Day writes.


Based on its channel checks, the investment firm warns that “significant near-term improvement remains unlikely” for local ad sales, although it will continue to hold up better than national. The forecast calls for local to decline and follow national’s lead in late 2022 and into 2023 with B. Riley’s model assuming “little to no improvement in broadcast radio ad spend” until the second half of 2023.


Hot and Cold Categories


Zeroing in on categories, the outlook is for car dealers, which “remain well off 2019 levels,” to not recover until late next year – at the earliest. Rising interest rates are stalling home refinancing and new mortgages and that has financial services, another key category, trending lower. Meanwhile, homeowner insurance carriers have not been able to raise premiums quick enough to offset inflationary pressures. And still struggling with workforce shortages, restaurants are showing “volatile” month-to-month ad spending patterns.


On the bright side, B. Riley calls for radio to benefit from growth in the pharmaceutical category as new drugs are introduced in the next few quarters. And automakers are on track to “spend heavily over the next few quarters on marketing and brand awareness for new electric vehicle models.” In addition, travel and leisure and other "get up and go" categories are poised to continue their year-over-year rebound.


Political Tracking Up 50% Over 2018


With control of Congress on the line in the mid-term elections, B. Riley is upping its political revenue estimates for radio’s three largest companies “Spending has thus far exceeded even the most optimistic expectations from earlier this year,” Day says in the report. He anticipates political coming in at a stunning 50% higher than in the last mid-term election cycle in 2018.


“Although radio broadcasters do not experience as strong a political bump as their TV counterparts, political revenue comes at very high incremental margins that should provide a direct boost to [free cash flow] through year-end,” Day says. “In our view, rising political ad spend is a structural trend that should continue to benefit radio broadcasters in future years.”


Slight Bump For Cumulus, Modest Dip For Audacy


B. Riley is slightly raising its third and fourth quarter estimates for Cumulus due to increases in political revenue. It expects investors to mainly focus on the pacing of Cumulus stock and debt repurchases. And it is modestly lowering its estimate for Audacy since the company is anticipated to report Q3 revenue that is flat to down low-single digits year-over-year. “We assume a more gradual recovery over the next few quarters on continued weakness in auto dealer ad spend, offset somewhat by the increase in political revenue estimates,” Day says. Investors will be most focused on potential asset sales in Audacy’s upcoming earnings call, after reports emerged last week that the company is shopping podcast studio Cadence13.

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