A prominent analyst says investors should look beyond the short-term impact supply chain shortages are having on auto and other key ad categories and take a longer view of radio’s growth potential. In a preview of radio’s third quarter earnings season, B. Riley Securities analyst Daniel Day says he expects advertisers will do what they’ve always done and follow consumers. And that, he predicts, will result in an increase in ad budgets for audio.
Day’s commentary focuses on radio’s three largest operators – iHeartMedia, Audacy and Cumulus Media – which he covers for the firm’s radio coverage group. Day is lowering his second half 2021 estimates due to supply chain and labor shortage issues that continue to dampen ad spending in key categories like auto dealers and local/regional restaurants. And he expects these issues to have a larger negative impact on second half earnings than he did before.
Looking ahead to 2022, the analyst is calling for sequential improvement in spot radio revenue, along with “robust digital growth, and an improved outlook for political ad spending.”
Of the Big Three, he anticipate iHeart to be “least impacted by these near-term headwinds” since it relies on a more diversified mix of ad categories and clients than Audacy and Cumulus. And iHeart has “continued to outpace peers” in the radio recovery, he notes, with 2021spot revenue (excluding political) expected to come in at 79% of 2019 levels, compared to 76% for Cumulus and 74% for Audacy.
Rising Political Estimates
While the B. Riley Securities analyst has lowered his 2022 revenue estimate for iHeart from an earlier “most aggressive” estimate, he still thinks the company will lead its peers with spot revenue recovering to 88% of 2019 levels versus 84% for Cumulus and 83% for Audacy. Earnings for all three, Day predicts, will be buoyed by “especially strong” political ad spending for the 2022 mid-term elections, which is on track to be closer to a typical presidential election year. In fact, the firm has raised its broadcast political estimates to 90% of 2020 levels and claims growing political ad revenue in even years is “a structural trend rather than a one-time boost.”
Thanks to what he calls its “industry-leading digital audio growth,” Day sees iHeart as the radio company most likely to eclipse its 2019 earnings levels by 2022. It’s his top pick for investors looking to increase their exposure to digital audio. His outlook is for iHeart to boost its digital revenue by 93% year-over-year in third quarter with even stronger podcast revenue growth of 150% year-over-year. Audacy and Cumulus are expected to grow “at slower, albeit still strong” rates of 27% and 28%, respectively, as digital represents “a potential positive catalyst” for all three companies.
His top value pick within the group is Cumulus, which is trading at 4.8-times enterprise value/EBITDA (a valuation multiple used to determine the fair market value of a company), while maintaining “the strongest balance sheet in the group.”
Brighter Long-Term Outlook
The research note encourages investors to look past temporary supply chain concerns and focus on “the brighter intermediate/long-term outlook as we expect brands/agencies to follow consumer behavior and increase ad budget allocation to audio.” He seizes on a study released recently from WARC that showed while 31% of consumer media consumption is audio, only 9% of ad budgets are allocated to it. Advertisers, he says, are “materially underspending” on audio, predicting that as the “audio investment gap” closes, the three companies are “particularly well positioned to benefit from this incremental spending on newer audio media including podcasts and streamed radio.” He also tells investors that as advertisers commit to audio, “they are likely to better understand the exceptional value, reach, and return on ad spend that AM/FM radio continues to provide.”