Analysts sour on radio, sending stocks lower

Several Wall Street analysts are out with new reports lowering their outlooks for radio stocks. They cite disappointing ad sales pacings and worry that there is no end in sight for the softness.

At Goldman Sachs, analyst Richard Rosenstein lowered his view of the entire radio sector from "attractive" to "neutral," telling clients that "the risk in radio remains high and the timing of improvement continues to be delayed and remains elusive." The analyst even criticized himself for waiting too late to turn bearish on radio stocks, noting that they are down 27%, on average, year to date. Rosenstein said Q2 revenues have developed in a "more tepid" way than expected - - he now expects growth for the quarter to be only 3-4%, rather than his original projection that growth would beat the 5-6% guidance of public radio groups.

He's also worried about Q3. "Contrary to recent trends in which months have begun strong then faded, pacing into July and August have started soft, and have continued to soften/turn negative in the last week. Unless this trend reverses, Q3 could disappoint, as well," he wrote. "Overall, our biggest surprise has been the degree to which radio inventory would be commoditized, and how soft pricing would be, given the consolidation of ownership that has occurred over the last decade.

For specific companies, the Goldman Sachs analyst lowered his ratings on Clear Channel, Citadel and Westwood One from "outperform" to "in line." However, he maintained Viacom at "outperform," saying that its "strength in cable and TV overshadows its weakness in radio."

Banc of America Securities analyst Jonathan Jacoby also lowered his view of the radio sector from a "buy" to "neutral." He downgraded Emmis to "neutral," even though he had upped the stock to "buy" on May 3rd, saying that New York City radio has weakened more than expected. He's also concerned that expenses from the Broadcasters Initiative - - the digital TV project being headed by Emmis - - could weigh on the company's stock.

"Our recent channel checks and pacings reports indicate that pricing weakness continues to plague radio growth," Jacoby said. He said July is pacing down approximately 4% and August is flat. "Radio spots lack perceived 'value'," he said. "Advertisers view radio spots as almost limitless, as operators have increased units dramatically during the late 1990s." The Banc of America Securities analyst also cut Entercom to "neutral" from "buy."

And the list of downgrades goes on. At Wachovia Securities, Jim Boyle lowered his estimates for radio stocks and reduced his full-year growth estimate for radio revenues to 4.8% from 5.5%. JP Morgan Chase analyst Spencer Wang went even further, saying radio is likely to grown only 4% this year.

RBR observation:

With all this bad news from the analysts, radio stocks didn't fall as much as you might have expected yesterday. Clear Channel even managed to post a modest gain for the day. Investors, it seems, were well ahead of the analysts and had already been selling off radio stocks. That explains why A.G. Edwards analyst Mike Kupinski, even while reducing his estimate of radio growth to 6% from 7% this year, saw a potential buying opportunity. "We believe that radio stocks are near the bottom," he told clients.