Wells Fargo Cuts Ratings For iHM, Audacy, CCO

• Citing Risk of Ad Market Slowdown during a Recession

The prospect of an imminent economic recession has triggered a rush to the exits in some media stocks by investors worried that ad spending could fall sharply, according to Barron's.

That concern spurred Wells Fargo analyst Steven Cahall on Friday to cut his ratings on three highly leveraged media plays, setting a target of zero for one company’s stock price. “All of our channel checks suggest an ad recession is mounting,” he wrote, with “a snap-down in shorter-cycle advertising like radio and digital.”

Cahall sees a particularly rough road ahead for broadcast radio, where he expects revenue to be down about 10% in 2023. He noted that radio ad spending fell more than 10% in the 2001 downturn that followed the bursting of the internet bubble, 25% in the 2008-2009 financial crisis, and 25% in the early 2020 slide tied to the onset of the Covid-19 pandemic.

He cut his rating for the radio broadcaster iHeartMedia (ticker: IHRT) to Equal Weight from Overweight, with a target of $9 for the stock price, down from $23. For Audacy (AUD), a smaller player in the radio market, he shifted to Underweight from Equal Weight, with a target of $0, down from $2.

And for the highly leveraged billboard operator Clear Channel Outdoor ( CCO ), he shifted to Equal Weight from Overweight, with a target of $1.50, down from $4.

All three stocks are selling off on the call, with iHeart down 5.3%, to $6.97, Audacy off 8.7% to 89 cents, and Clear Channel Outdoor 8.3% lower to $1.17. So far this year, Clear Channel and Audacy are down 65%, while iHeart is off 67%.

Cahall said his previous view on iHeart had been that the stock could be driven higher either by growth in its digital and podcasting business, or through deleveraging its balance sheet. A recession, he said, will “put those narratives on hold,” with a “major reduction in radio spend” now dead ahead. He noted that with more than $5 billion in net debt, even modest changes in the outlook for the company can have a big impact on the share price.

The company declined to comment.

Cahall made a similar critique of Audacy, but said he believes the company’s financial condition is more dire, with a $600 million term loan coming due in November 2024. A a revolving credit line is due in August 2024.

“A restructuring seems likely enough that we do not think investors should own this equity,” Cahall wrote. “It now looks as though it’s unlikely that Audacy would be in a position to repay the debt at the due dates. There may be some appetite for refinancing, and we expect management to work hard on alternatives to a restructuring. Debt holders may step in to help. But an optimistic scenario …is far from certain …There’s no easy fix.”

Audacy said in response that it is taking steps to offset pressures on its business.

Cahall said that while he generally has a positive view of the out-of-home advertising market, he nonetheless thinks marketers are likely to cut spending on the category in a recession. He notes that spending on out-of-home ads, basically billboards, was flat in the 2001 downturn, but off 17% in the Great Recession and 27% in the early 2020 downturn.

He said Clear Channel remains highly leveraged, with more than $5 billion in net debt. As with iHeart, he said, even small changes in earnings and multiples can have a big impact on the company’s equity valuation. Clear Channel didn’t immediately respond to a request for comment.