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Analysts cautiously optimistic about "less is more"

After hearing management's explanation of Clear Channel's "less is more" initiative to cut commercial clutter on its radio stations, Wall Street analysts seem to be buying into the idea, but remain cautious about what it will mean to the company's financial results. They still see soft quarters ahead for radio and want to know when things will get better.

"CCU is actively moving to improve its radio division in the long term and deserves kudos for proactively acting upon the disappointing CCU and discouraging sector results," Wachovia Securities analyst Jim Boyle said in a note to investors. "Although CCU may be trying to remedy the symptoms more than the root cause (7/16/04 RBR Daily Epaper #138), its actions should help. Presently, the first move is the recently announced reduction in commercial spot loads to more palatable clutter levels for both the listeners and advertisers. The second CCU move is its announcement of a faster and cheaper-than-expected transition to digital sound (7/23/04 RBR Daily Epaper #143), which should please listeners and blunt one of satellite ratio's selling points. A third move is a little noticed sales commission structure change."

Of the latter, Boyle explained that Clear Channel is going to incent its sales force to sell at higher prices, rather than on volume. For example, an AE gets the same commission now for selling five spots for $100 each as for two spots at $250, since the total sale is $500 in each case. But under the new commission schedule, the AE would get a higher commission on the two spot sale.

Noting that Clear Channel management says it does not expect a disruption in revenues from the "less is more" initiative, Boyle says he is still looking at the data to see if he concurs. For now, he's lowered his Q3 estimate for radio industry growth (from 1.5%) and believes that Clear Channel will underperform that.

At SG Cowen & Co., analyst James Marsh says he expected the soft Q3 guidance from Clear Channel and is sticking with his previous estimates. Noting that current radio trends are "not pretty," he still sees Clear Channel's stock as underpriced and his discounted cash flow model suggests that the company should outperform the market by 26.7% over the next 12 months.

Thomas Weisel partners analyst Gordon Hodge has cut his 2004 EBITDA estimate for Clear Channel by $30 million to $2.44 billion to reflect lower Q3 radio growth. He's dropped his Q3 estimate of radio growth at the company to 1% from his previous 5%. In his view, 2005 growth in Clear Channel's stock price could be driven by the "less is more" initiative and company stock buybacks.