That’s the warning to investors from analyst Lee Westerfield at BMO Capital Markets. After seeing the RAB report that November radio ad revenues were down 7% (down 6% including NTR), Westerfield has lowered his Q4 revenue and EBITDA estimates for Emmis, Clear Channel and CBS Radio. And he isn’t stopping there – also cutting his expectations for 2008 and 2009.
“In our view, plummeting ad rates in Q4 will put 2008 and even 2009 at risk; historically, ad rate levels have been regained only gradually after contraction (true from 1991 to 1994 and 2001 to 2003). This ad-rate-contraction scenario reflects the elasticity of ad prices – we estimate that as marginal demand contracts, radio ad rates will fall by 3-4% over the coming six months, and not recover to current levels for 18 months,” Westerfield said in a research report to clients. He is projecting that radio ad sales will drop 2% in 2008. He also doesn’t see any more bids to take out public radio companies and go private in the current lending environment. Furthermore, he notes that Emmis and Regent are both in danger of breaching senior debt covenants. Each can sell assets to remedy that, but Westerfield warns that such sales would be at “fire sale” levels. With all those negatives, he sees a danger that radio stocks, which already fell significantly in 2007, could drop another 15-30% in 2008.
RBR observation: Just look at Citadel if you want to see what happens when a selling frenzy feeds on itself. The stock was down 72.5% last year – and has fallen even more this month. A potential US recession and continued bad reports on radio ad sales could send radio stocks tumbling even more than they have already. Is there any good news on the horizon to counter this trend?