Shareholders Anticipate Tuneup in Radio Sector

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Wall Street’s expectations for radio companies are so low that any results short of catastrophe look good.

Sure, the whole market’s been on the rise, and that’s part of what’s behind the increased value of stock in Salem Communications and Entravision Communications, where shares soared in August.

But radio is a special case. There are other factors that are boosting stocks. Short-sellers are covering their positions, and ad sales are coming back. The latter means the stations will be able to better cover their debt, so investors have become optimistic.

“You have general investor sentiment that the recession is ending and that’s good for anybody who depends on advertising for revenues,” said James Dix, an analyst at Wedbush Morgan Securities in downtown Los Angeles who covers Entravision.

On the local front, shares of Salem, a Christian radio chain based in Camarillo, rose more than 220 percent for the month, closing Aug. 27 at $2.79 per share. Shares of Entravision, the Santa Monica-based Spanish-language radio company, were up 130 percent to $1.35.

The rise in stock price came despite less-than-brilliant results.

For the second quarter, Salem reported a loss of $5 million, or 21 cents per share. Entravision reported a net loss of $1.8 million, or 2 cents a share. While that’s dismal compared with the year-ago quarter, the losses are much lower than in the first quarter of 2009.

Jim Boyle, a radio sector analyst at Gilford Securities in New York, said radio broadcasters are among the first companies to see signs of recovery, because ads are sold only weeks or even days before air time, while print and television campaigns are booked far in advance.

“Investors are looking six to nine months out, and since ad-supported media is economically sensitive, that magnifies the rebound,” he said. “Salem and Entravision are both niche-format groups. For the last several years, the groups that have done best in audience and advertising are niche media such as Hispanic, African-American, and religious.”

Salem and Entravision far outperformed the broadcast sector: Charles Schwab Co. data show the sector, which includes radio and television, rose 39 percent in August.

Executives at Salem and Entravision declined to be interviewed for this story.

Saul Levine, owner of KKGO-FM (105.1), a country music station in West Los Angeles, said the stock market has been wrong about radio’s prospects.

“We are dealing with irrational fear,” said Levine. “The existing price of radio stocks is so outrageously low it makes no sense. My opinion is radio stocks are going to go up radically.”

KKGO’s ad revenue in the first quarter of the year was soft, he said, “but not a catastrophe. And since then it has come roaring back.”

The prospect of a pickup in business has alleviated investors’ worst fears, Boyle explained.

“When you see stocks trading below a dollar, it often means investors are worried if they’re going to continue as going concerns,” he said. “Now if they aren’t going to die, they are going to bounce back. And because they were lower than a dollar, they will get a big bounce back.”

Meanwhile, short-sellers drove the price of radio shares down and now they’re betting in the opposite direction and driving them back up.

Between July 31 and Aug. 14, the number of shorted Entravision shares fell by 52 percent, according to Bloomberg.

“Anytime there’s a surprise to the positive it can cause magnified effect because not only do people want to buy it in reaction to the good news, but also the people who shorted it have to cover their positions,” Dix explained.

Looking forward, Salem’s guidance for the current quarter predicts a 12 percent to 15 percent decline in revenue compared with last year, but a continuing improvement over the lows earlier this year. Significantly, the company also plans to cut expenses by the same percentage, pointing to profitability.

Entravision did not offer guidance, but Chief Executive Walter Ulloa said in the second quarter statement that the company is “well-positioned to benefit when the economy recovers, given the strength of our brands and our ability to deliver the valuable Hispanic audience to advertisers.”

In recent months, two of the three analysts who covered Salem have dropped the company from their watch lists.

Dix at Wedbush Morgan maintains his “underperform” rating on Entravision even though the stock has doubled in the last month. He noted that the company traded for around $8 range in late 2007, so it’s not really good news that it’s no longer a penny stock.

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