Cox Radio (NYSE: CXR) isn't that explosive growth company you've been looking for. In fact, things have been pretty flat lately. Increasing competition from satellite radio and a sluggish ad market have taken their toll.
Consider Wednesday's second-quarter report. Free cash flow (FCF) came in at $27.5 million, up less than 1% quarter over quarter. Revenues were $117.3 million, also flat compared to the same quarter last year. Net income did creep up with a 1.7% increase to $20.6 million, but this doesn't even keep pace with inflation.
To be fair, the quarter was affected by the cancellation of the Atlanta Braves broadcasting agreement. Factoring this out would have led to 5% net revenue growth. And Cox will probably see better growth rates going forward. But before diving into reveries of traditional radio bargain prices, be sure to take a no-nonsense approach to sizing up the competition.
First up is satellite radio. The duopoly includes XM (Nasdaq: XMSR) and SiriusSatellite (Nasdaq: SIRI). Both are increasing their subscribers at breakneck speeds. By fiscal year-end, they plan to boast a combined total of 10 million subscribers. And remember, every subscriber they add is one less set of ears listening to traditional radio, which could lead advertisers on Cox to demand lower rates. Not good.
MP3 players pose another competitive threat. Whether it's an in-dash unit or Apple's (Nasdaq: AAPL) trendy iPod, the principle remains the same. Both allow the user to play hundreds of songs over their car audio system. As the technology gets cheaper and easier to use, people are more likely to bypass radio altogether and opt instead for their huge collection of MP3s.
But before you make a mad dash for the emergency exits and write off the business completely, consider the fact that traditional radio is free and convenient. There's no better way to get local news and traffic while you're fighting through rush hour on the way to work.
Satellite radio subscriptions and MP3 players, on the other hand, are more of a luxury item. They can slow Cox's revenue growth, but the high-margin, cash-generating potential of traditional radio will more than likely remain.
That's why I keep Cox Radio on my watch list. If the shares ever fall, the tricky part will be deciding on a price that's low enough. The shares need to discount the effects of future competition and offer a margin of safety on top of that. At 16.8 times fiscal '04 FCF, we're not there yet. But if the economy heads south or there's a negative earnings surprise, tune in and you can probably get a decent business at a great price.
Fool contributor Matt Thurmond has no financial interest in any of the companies mentioned above.
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