Sector Preview: Radio Station Operators

The likelihood of a recession has increased in recent months as the housing market slump, credit crisis and rising fuel costs have slowed manufacturing, consumer spending and corporate hiring.

Analysts say radio operators are highly vulnerable to an economic downturn because of their strong ties to local advertising. According to Lehman Brothers analyst Anthony DiClemente, local advertising accounts for about 80 percent of radio broadcasters' revenue.

The economic weakness is only accelerating what has been an ongoing slowdown in local radio advertising as advertisers shift to other forms of media particularly the Internet and to national campaigns.

At the same time, radio audiences have been eroding as Internet radio becomes more popular, satellite radio expands and listeners increasingly use digital music players like iPods in their cars.

Radio industry revenue fell 6 percent in November, compared with the same month of the prior year. Banc of America Securities analyst Jonathan A. Jacoby noted that the results were worse than his expectation of a 5 percent decline.

Jacoby said there is a "high probability" that most radio operators will miss his fourth-quarter estimates.

Jacoby said CBS Corp. and Citadel Broadcasting Corp. are at the highest risk of falling short. He said Cox Radio Inc. is least likely to miss estimates, but noted that the company is also dependent on local advertising.

"Absent a cyclical shift in advertising demand or secular improvement in audience, inventory, or pricing power, we remain cautious on the sector and expect another year of challenging fundamentals and stock price performance," said Goldman Sachs analyst Mark Wienkes.

Analysts said radio may benefit from political advertising in advance of the 2008 presidential election, but a significant boost is not expected until the second half of 2008.