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Birdwatchers analyze Emmis' chirping canary

If Emmis Communications, which reports quarterly earnings about a month ahead of everyone else, is the canary in the broadcasting coal mine, Wall Street analysts are trying to discern what Jeff Smulyan's report last week (7/1/04 RBR Daily Epaper #128) says about the health of other radio and TV groups.

"TV hot, radio lukewarm," was the short-hand assessment topping a report issued by analyst Jim Boyle of Wachovia Securities. "TV was very strong once again for Emmis' turnaround mid-market stations, stemming from both core and political robust advertising at 16% pro forma growth. This is quite admirable, but not enough to sustainably excite investors or analysts, as most are waiting for the radio sector recovery to take hold." Boyle said Emmis' guidance of 3% radio growth for its fiscal Q2 (June-August) is in line with his view of the radio sector, so could prove to be a bit conservative, given that Emmis has been outperforming its markets.

Most importantly, Boyle noted three trends in last week's discussion by Emmis management - - two good and one bad. The analyst applauded Emmis for not adding inventory, which increases clutter, and for being able to raise rates in an environment where rate-cutting has been common. However, Boyle remains concerned about continuing late placement, "as that means buyers don't feel they have a need to lock in rates now so as to hedge against potential rising rates long term."

As a result of the latest guidance from Smulyan and company, Boyle has lowered his full year estimate of revenue growth at Emmis' domestic radio division from 7.1% to 5.9%, but boosted his TV growth estimate to 9.7% from the previous forecast of 7.3%.

At CIBC World Markets, analyst Jason Helfstein said Emmis' guidance of 3% radio revenue growth for the current quarter should allay some fears about the radio sector, despite weak demand in June and July. "since we believe that medium-sized and smaller markets are currently experiencing growth above that of the larger markets, we think Emmis' guidance should be a positive for the radio group today," he wrote in a note to investors just after the quarterly numbers were posted on June 30th.

"Guidance for radio is soft, but not as bad as some feared, giving the lie to radio doomsday scenarios," said James Marsh at S.G. Cowen & Co. The analyst said Emmis' stock price is attractive, based on his discounted cash flow analysis in which Emmis trades below the average for radio stocks. "We believe sentiment on the radio group is likely to improve from its current nadir as growth accelerates into the back half of the year," Marsh told clients.

"While Emmis' fiscal Q1 was a bit stronger than expected, it is important to remember that its fiscal quarter included March, which was by far the best month of the year, with radio industry revenues growing10%," wrote Goldman Sachs analyst Richard Rosenstein. "April-June revenue trends were much softer, and we believe that calendar-year-reporting radio companies are more likely to see radio revenue growth of 3-4% in the Q2, with some operators doing slightly better."

Rosenstein hoisted more red flags about clutter in his note to investors, saying the problem will not be resolved quickly, notwithstanding claims of greater cooperation by group heads to address the problems that are hurting radio. "Emmis commented that it had raised pricing for five consecutive quarters, but it did not quantify by how much, nor do we believe this is likely the case with other operators. With record high spot loads persisting, it is not inconceivable that advertisers have felt that their advertising messages may be lost in longer pods of commercials. In this regard, radio cannot help but be commoditized, in our view," Rosenstein said.