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Bear of The Day: iHeartRadio (IHRT)

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iHeartMedia (IHRT - Free Report) , the #1 audio media company in the US, has emerged from bankruptcy, and its ownership is now available to the public on the NASDAQ exchange, but are they worth buying? Analysts have continued to drop their expectations as this medium progressively loses popularity, and costs grow faster than revenues. IHRT currently sits at a Zacks Rank #5 (Strong Sell).

IHRT closed its first day back on the market at $18 in the beginning of May and has since fallen over 15%. Its most recent earnings illustrating an enormous EPS miss, and a 10% viewership decline from the year prior. I fear that these shares may have a further downside ahead of them.

The Bankruptcy

iHeartMedia filed for chapter 11 bankruptcy on March 14th, 2018, and finally rose from this strenuous restructuring on May 1st of this year. Bond owners and lenders have since taken control of the company from private equity firms Bain Capital Partners and Thomas H. Lee Partners. This transfer of control was headed by Franklin Advisers, leaving both the CEO and CFO in their current positions.

This firm’s downfall into bankruptcy was due to a few key factors. The first being the timing of the leveraged buyout by Bain and Lee, which occurred on the brink of the 2008 credit crisis. This buyout put roughly $20 billion in debt on iHeartMedia’s balance sheet at a time when both advertising revenues were plummeting, and extensive lines of credit were hard to come by.

The second contribution to this media behemoth’s downfall is advertisers’ opportunity cost with more engaging platforms. Advertisers don’t typically see the same return on investment from radio ads compared to say a personalized Google (GOOGL - Free Report) or Facebook (FB - Free Report) ad.

This depreciating return on ads over the airwaves has led to a depreciating willingness to pay by firms. Costs for iHeartMedia have been growing, but unfortunately, revenues haven’t been able to keep up.

The excessive $1.48 billion annual interest expense was hemorrhaging funds from the company, and when $16.4 billion in debt matured, they had no choice but to file for bankruptcy.

iHeart’s reorganization involved a spinoff of its outdoor advertising company, rebranded as Clear Channel Outdoor Holdings. This allows the firm to focus on its higher-margin core radio business.

Can iHeartMedia Come Out of the Ashes?

The company owns 848 live broadcast radio stations, six times its closest competitor. The US radio advertising market is sitting at $15.9 billion, according to PwC, but this figure isn’t expected to see much growth in the coming years. iHeartMedia is going to have to leverage their digital radio streaming platform to capture needed growth moving forward.

iHeartMedia’s digital segment makes up only 7% of the firm’s topline but is responsible for most of its topline growth. The digital radio streaming is expected to grow 23% over the next three years. With increasing expenses at seemingly every corner, this small topline driver may not be enough to keep IHRT afloat.

The main issue with iHeartRadio is that its primary revenue drivers are coming from a declining market. We are living in a digitalized world, and traditional radio is losing viewership. Advertisers’ willingness to pay is progressively declining, with no expectations of growth. iHeart owns most of the US’s radio networks, but in a space with shrinking margins and a falling user base, this is not an easily leverageable offering.

Take Away

The media behemoth has finally risen out of the ashes of chapter 11 bankruptcy, but the question is whether they have eliminated the systemic issues that led them there. They are keeping both the current CEO and CFO in place, which causes me some concern over a potential lack of constructive changes.

CEO Bob Pittman is quoted after the bell this morning saying, “We’ve had a very good operating business but our capital structure was not in good shape.” This is not the full story considering the shrinking margins that iHeart has been experiencing was one of the bankruptcy catalysts.

iHeartMedia is the leader of a dying media channel, and I fear that without a substantial strategy pivot, the company may be headed right back into bankruptcy.

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