Market spotlight: Radio woes worsen as economy slows

The signal continues to fade on radio stocks.

The decline in advertising revenue in nearly all major markets has continued unabated as listeners abandon the format for prerecorded music and commercial-free satellite radio.

Operators have tinkered with formats trying to draw back listeners, but attempts such as the failed Jack FM in New York have fallen flat.

Investors have shifted money from the sector, leaving all major broadcaster stocks down by double-digits in the past year. A year ago, stocks were buoyant as private equity investors circled the sector. Now they, too, have lost interest.

Recent approval for the creation of a satellite radio monopoly is likely to only make things tougher for the sector. And analysts are advising investors to maintain their distance, at least for now.

"We have a hard time envisioning a scenario in which these fundamental concerns are reversed," Bernstein analyst Michael Nathanson said in a note to investors.

And then there is the economy. Consumer spending has slowed, and consumer confidence is falling, meaning consumption is likely to contract along with the overall economy. Advertisers have reduced spending accordingly, with all media, from newspapers to television recording revenue drops.

"We believe the broadcasting industry growth could be vulnerable to slower than expected advertising growth, should consumer confidence weaken significantly," said RBC Capital Markets analyst David Bank.

Local and national radio advertising revenue fell 4 percent in February after a decline in January, according to the Radio Advertising Bureau. That comes after the industry posted an annual drop in 2007.

"National advertising continues to be a weak spot because that is where the slowing economy is felt most," said Noble Financial analyst Michael Kupinski.

He expects 2008 radio ad revenue to rise by 2 percent, with a strong burst in the second half of the year from political advertising. "Radio should get a little pop from the economic stimulus, and the overall economy should improve somewhat," he added.

But even in times of robust advertiser spending, retailers and employers have turned to other media, particularly the Internet. Nathanson does not expect that to change too much.

He predicts the operators will lose even more listeners to satellite radio now that the Justice Department has approved Sirius Satellite Radio Inc.'s purchase of rival XM Satellite Radio Holdings Inc.

"A unified product will likely be a growing problem for terrestrial radio," he said. "If not, then why did the radio industry lobby so strongly against the merger?"

The decreased earnings power has been evident in share prices. The largest radio operator, Clear Channel, has seen its stock fall 21 percent in the past year _ with much of that decline coming in recent weeks after a group of banks financing a $19.5 billion management-led buyout allegedly balked at putting up the money for the deal.

Equity buyers, led by Boston-based Bain Capital and Thomas H. Lee LLC, agreed last year to pay $39.20 per share for Clear Channel, far more than Thursday's closing stock price of $28.06. The current market price would saddle the banks with an immediate loss of at least $2.7 billion.

"Reports surfaced (in March) that the banks...expressed remorse almost immediately after the ink had dried on their financing letters," Nathanson said.

Private equity investors provided the main boost to the sector last year, and their absence has been felt beyond Clear Channel.

Cox Radio Inc., one of the largest operators by market capitalization, fell 22 percent in the last 12 months after being up on rumors that it would find a suitor.

The sector as a whole is down 22 percent over the past year, according to Morningstar's radio index. Radio One Inc. has been the hardest hit, falling a precipitous 82 percent. Citadel Broadcasting Corp. is off 76 percent and Westwood One Inc. has shed 74 percent.