IHeartMedia Stock Tumbles as Morgan Stanley Turns Cautious on Ad Outlook

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There’s trouble coming in the advertising market, and that is not good news for investors in

iHeartMedia
,
the largest U.S. operator of radio stations.

IHeart shares (ticker: IHRT) are getting clobbered on Friday after

Morgan Stanley

media analyst Benjamin Swinburne cut his rating on the company to Underweight from Equal Weight, with a new price target of $11, down from $25. IHeart stock was down 12.8%, at $9.57, in recent trading. The

S&P 500
was down 2.8%. 

For the year, iHeart shares are down 55%.

Swinburne says a possible recession and the company’s highly leveraged business—the company has more than $5 billion in net debt, with a market cap of just $1.5 billion—creates “outsized risk to the equity.” He also sees the company’s core broadcast radio business “as structurally challenged by shifting consumer listening habits.” And he notes that while iHeart’s digital audio business is growing impressively, it has lower margins than the core broadcast business.

Swinburne’s downgrade was part of a broader cautious call on the outlook for the advertising business. He reduced his 2023 ad spending outlook to price in “a mild recession.” And he adds that “decelerating ad growth with recession risk” also points to pressure on valuation multiples.

The analyst also cut his rating on

Lamar Advertising

(LAMR), a billboard company, to Equal Weight from Overweight, with a new target of $103, down from $135. He also trimmed price targets on

Outfront Media

(OUT),

Clear Channel Outdoor

(CCO),

Interpublic Group

(

IPG

), and

Omnicom Group

(OMC). All of those stocks are down 3% or more on Friday, excepting Omnicom, which is down 2.1%. He also reiterated his Underweight rating on

Sirius XM Holdings

(SIRI), where he is cautious on the ad outlook for its Pandora streaming radio business.

“Current trends remain robust across out of home, the ad agencies, and audio,” Swinburne writes. “However, we see rising risk that ad budget growth will slow and perhaps dramatically in ‘23.”

Asked to comment on the downgrade, iHeart provided Barron’s with a detailed response.

“While we understand and appreciate the work of analysts, we would expect their analysis to be thoughtful and thorough—and we believe the Morgan Stanley note falls short in this regard,” Wendy Goldberg, iHeart’s executive vice president for marketing and communications, said in an emailed statement. “We would note that the massive ad downturn at the beginning of the pandemic is instructive about how our company fares in a downturn: Our broadcast advertising took the biggest dip, our data-enabled smart audio and our radio networks business less so—and our digital business kept growing, with our podcasting business growing at an even greater rate.

“And today, we are less reliant on that broadcast radio revenue and have a more diversified revenue mix attributable to increased digital revenue. At the beginning of the pandemic, our digital business was just 10% of our total revenue and now it is 25% of total revenue, with podcasting alone making up almost 10% of our revenue. Additionally, our broadcast radio inventory is now data-enabled to make it more like digital ad inventory, and we have built out our electronic marketplaces which combine broadcast and digital inventory and audiences, serving common audiences seamlessly for our advertisers. In terms of leverage, even in that deep ad pullback in the 2020 pandemic year, we still had positive free cash flow with higher leverage than we have today. 

“These facts do not appear to be reflected in the Morgan Stanley analysis, and their conclusions with regard to demographic audiences appears to be in conflict with the leading third-party research about radio listening—including Nielsen. That research shows that the millennial audience for AM/FM remains strong and continues to outreach both TV and digital.

“Unfortunately, it doesn’t look like the analyst has done a full and updated analysis of our company.”

Write to Eric J. Savitz at [email protected]