Citadel Broadcasting's Ugly Tune (CDL)

Citadel Broadcasting (CDL) will report earnings later today -- here's a quick look at this stock's strengths and weaknesses.

Overview
Citadel owns and operates radio stations through a portfolio that is diversified by programming formats, geographic regions, audience demographics and advertising clients. Right now, Citadel owns and operates more than 200 (163 FM and 58 AM) radio stations in 49 markets located in 24 states across the US. Its size is surely a marvel.

So why is the stock at a 52 week low?

In our view, Citadel is confronted with a plethora of competitive threats: local cable TV, the boom in digital music portable players, and the rapid ascent of satellite radio providers like Sirius and XM all attest to Citadel's fragile position. As these new threats siphon away Citadel's ad dollars, shares of Citadel could see further price depreciation in the months ahead.

Citadel has fueled its growth with acquisitions, which can be a great use of shareholder capital if and when acquirers pay a decent price. That cannot be said of Citadel, which has arguably overpaid for its buys. Other Citadel attributes we frown at: Citadel is laden with debt and shareholders have little say in the company. One other oddity: CDL's dividend is higher than its earnings!

Risks
Citadel carries a pile of debt and our earnings outlook for he company is bleak. We are far from impressed by the 4% earnings growth analysts are predicting for the next 12 months. In addition, Citadel's operating income barely covers its interest expenses (2.5 interest coverage ratio) -- we tend to look for companies that can cover interest obligations at least 4 x over. A firm with large debt obligations can't afford turbulence. Because the skies for Citadel over the next year look anything but clear, we view the stock as high risk.

Valuation
With earnings expected to grow just 4% from 2006 to 2007, we view Citadel -- which trades at 18 x next year's results -- as overvalued. With less than 4 cents in cash per share on the books, we refuse to pay more than 4 x growth for Citadel.

The Bottom Line
A bad company + a fat dividend yield (CDL pays a 7.5% yield, probably the only thing propping up the stock) does not equal a good investment idea. This is a company with weak management, handcuffed shareholders, and negative net tangible assets.

We'd wait until the stock hits $7 before picking up shares -- and even then, you'd have to put a gun to our head for us to buy.

CDL 1-yr Chart