Investors Tune Out Cox Radio

Highlights include Cox Radio, Inc. (CXR), Radio One, Inc. (ROIAK - Analyst Report), Cumulus Media, Inc. (CMLS - Analyst Report), Entercom Communications Corp. (ETM - Analyst Report) and Emmis Communications Corp. (EMMS - Snapshot Report).

Cox Radio (CXR) reported 4Q08 earnings that, as expected, showed ad revenue continuing to tumble -- down 13% -- as the economy sinks. Station operating income plummeted 36% to $29.6 million, and free cash flow fell 40% during the quarter.

Fundamentals are set to get even weaker after 18 consecutive months of ad revenue declines, as CXR’s revenue and EBITDA growth are eviscerated by the recession. Exacerbating the decline are secular industry pressures, as listeners migrate to recorded music (iPods), satellite radio and the Internet. Longer term, the industry is facing the challenge of reinventing itself to develop new revenue streams and offset ad share losses to the Internet.

To reflect the permanent impairment of the value of its FCC licenses and other intangible assets, Cox Radio wrote-down 35% of its value, taking a $602 million charge in 4Q08. Excluding the after-tax impairment charge, the company earned $0.19 per share, slightly below our estimate of $0.22, and off 15% from the $0.26 per share (after impairment charges) reported in 4Q07.

Shares of Cox Radio fell more than 7% after it reported 4Q08 earnings. The shares have been battered, trading 64% off their 52-week high, but are fairing better than Cox’s competitors, which have lost 86% of their value on average over the last year. However, we think Cox Radio’s relatively healthy balance sheet makes it one of the best-positioned publicly-traded radio operators to weather the recession.

At 3.0x (debt/EBITDA), Cox Radio is significantly underleveraged relative to its peers (radio group median is 6.5x), making it one of the few publicly traded radio operators with ample coverage of its debt service at a time of declining cash flow.

Radio One (ROIAK - Analyst Report), Cumulus (CMLS - Analyst Report), Entercom (ETM - Analyst Report) and Emmis Communications (EMMS - Snapshot Report) are all sinking under the weight of heavy debt (with leveraging ranging from 5.3x to 6.8x) incurred through share buybacks and acquisitions as they attempted to grow and boost shareholder returns in a declining industry.