Two more glum views from Wall Street

Following RAB's report that August radio revenues were down 1% (10/4/04 RBR Daily Epaper #193), two more Wall Street analysts are out with negative assessments of the outlook for radio. Both James Marsh at S.G. Cowen & Co. and Gordon Hodge at Thomas Weisel Partners have lowered their estimates for Q3 and Q4 - - and say 2005 is looking iffy as well.

"We estimate radio industry revenues finished flat in the third quarter. Consequently, we believe most radio broadcasters will report third quarter results at the low end of average guidance ranges calling for low single digit growth," said Marsh in a note to clients. "Our channel checks indicate that fourth quarter pacings are soft, offering little promise that radio broadcasters will inspire positive earnings estimate revisions when they give fourth quarter guidance. Furthermore, an increasingly competitive outlook for 2005, which will lack many of the expected 'sure thing' catalysts of 2004 (easy War comps, political, Olympics, favorable second half comps) leaves us less sanguine than before about the industry's growth prospects for next year."

Marsh is estimating that September radio revenues were up 2.8%, just enough to make the quarter flat after the losses of July and August. But he believes national spot was down 2%, finishing in negative territory for each month of the quarter. The S.G. Cowen analyst expects Q4 to be better, up 2.7% over all (bringing the full year in at 2.4%), but that's down from his previous estimate of 5.8% - - and he expects Q4 guidance from radio companies to fall short of the consensus estimates currently posted by Wall Street analysts. Marsh has also dropped his 2005 growth estimate to 4% from his previous 4.7%.

At Thomas Weisel Partners, Hodge has cut his 2004 growth estimate to 1.7% from 4.3% and 2005 to 2.3% from his previous 5%. "Our 2004 estimates reflect anecdotal evidence about Q3 sales and Q4 pacings, which appear not to be benefiting from expected political ad spending (or if they are benefiting then business is even worse than it looks). Our lower 2005 estimates reflect an expected 4% reduction in industry advertising inventory by market leader, Clear channel in 2005, assuming the company actually follows through on an announced 19% reduction in commercial spots," Hodge said.

Noting that radio stocks, as a group, are down 31% this year, the analyst says he doesn't see any catalyst to turn around investors who have soured on the sector.

Despite the gloomy outlook, Hodge is giving a thumbs up to a couple of radio stocks. He reiterated his "outperform" rating on Viacom, saying its Infinity radio group could benefit from rival Clear Channel's plan to cut ad inventory - - "but don't hold your breath," he added. He also likes the fact that after spinning off its Blockbuster stake, more than 50% of Viacom's operating cash flow will come from its fast-growing cable networks - - a more important factor than Infinity.

Hodge also said that Westwood One is bucking the down trend in radio, with Q4 sales estimated to be up 4-5%. He also sees growth opportunities with Spanish specialists Univision and Entravision. Hodge, by the way, downgraded Clear Channel from "outperform" to "peer perform."