Noble Capital Markets

Will increased attention on reducing debt help the radio business? That’s the question posed by Michael Kupinski, media equity research analyst at Noble Capital Markets, in the investment banking firm’s latest Media Sector Review. Radio stocks did well in the second quarter, rising 3.5% compared to a 3.8% gain by the general market as measured by the S&P 500. Radio narrowly out-performed television stocks (+3.5%).

Noble’s Radio Index is market cap weighted, and when it peels back the onion, shares of Entercom (up 11% in Q2), and Cumulus Media (up 3%) accounted for the overall performance of the industry. Kupinksi calls it “notable” that Cumulus added 3% to its stock price in the second quarter following a very strong first quarter. In fact, year-to-date, Cumulus shares are up a significant 72%, leading the radio pack.

“Cumulus has been aggressive in re-positioning its station portfolio, selling stations where it does not have the opportunity to create significant in-market penetration, or swapping stations to build upon its existing presence in markets,” Kupinski notes. This is what Cumulus CEO Mary Berner calls its “portfolio optimization” plan. In addition to improving its position in some markets, while bailing on others like New York and Los Angeles where it didn’t have scale or top performers, the company is using proceeds from station sales to more aggressively reduce debt. “In our view, the company plans to continue to re-evaluate its station portfolio and may seek acquisitions or asset sales to boost in-market penetration,” Kupinski says. By comparison, the second quarter’s worst performing radio stock was Beasley Broadcast Group, down 19%.

Yesterday, iHeartMedia returned to the public markets with a listing on the NASDAQ Global Select Market. “We believe that investors are likely to focus attention in the upcoming quarter on iHeart Media,” Kupinski predicts, adding that the company's financial reorganization – it emerged from Chapter 11 on May 1 – should help the entire industry. “It appears that the top industry leaders, including Entercom, Cumulus Media and iHeart, all appear to be tackling their heavy debt loads. We would expect that each company will be reviewing its portfolio, much like Cumulus Media, and may sell and/or swap stations to improve in-market penetration,” Kupinski says in the report. These moves will help management focus on improving “fundamentals rather than making decisions to service the debt.”

One company that Noble views as overlooked by investors is Townsquare Media, whose stock was down 6% in the second quarter, but up a strong 32% through mid-year. “We encourage investors to focus on Townsquare Media,” Kupinski says, rating its shares as “Outperform.” Even as its stock trails the valuation of its radio peers, the company has “some of the best fundamentals in the industry” with above average revenue and cash flow growth. Much of that is driven by its digital business, which delivers about one-third of its revenues and is expected to generate 50% of sales in a few years. “This is far better than the radio industry overall, where digital revenues currently account for a modest 8% of revenues,” Kupinski says.