iHeartMedia: Look Past Tough Political Comps

Nov. 16, 2021 11:04 AM ETiHeartMedia, Inc. (IHRT)7 Comments1 Like

Summary

  • iHeartMedia reported another strong quarter, soaring past analyst estimates.
  • The media company continues to make huge progress in shifting to digital media with Digital Audio revenues growing over 77%.
  • The stock is far too cheap trading at an EV/EBITDA at only 7.7x '22 targets.
  • This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »
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iHeartMedia (NASDAQ:IHRT) slumped ~$8 heading into the Q3'21 results despite the media company smashing analyst estimates for the quarter. The business faces tough comps in the current quarter due to the political spending last year, but investors should've already known about these tough comps. My investment thesis remains Bullish on the stock, especially after this dip back to $22.

Digital Boost

iHeartMedia beat Q3'21 revenue targets by a very strong $13.6 million. The company grew revenue 20%, or a very strong 31% when excluding the political boost from last year.

Revenues were back to $928.1 million, but still shy of the $948.3 million highs in Q3'19. In the process, the company now has a massive digital business with Podcast revenues up 184% to $64.2 million. The whole Digital Audio business is now $205.8 million providing the company with a growth path to move beyond traditional broadcast radio programs.

IHRT stock Q3 results

Source: iHeartMedia Q3'21 presentation

The hiccup with the stock came on the discussion of October revenues being flat with 2020 levels due to the loss of political ad revenues. When excluding political ads, revenues are forecast to grow 22% in the current quarter. The full Q4'21 guidance is for revenues to grow 10%, even when including political.

iHeartMedia had Q4'20 revenues of $935.5 million suggesting revenues reach $1.03 million in the current quarter. The company could top the Q4'19 levels of $1.03 billion when adjusted EBITDA margins were 27%.

The digital business currently has slightly higher EBITDA margins at 32.6% versus 31.6% for the legacy Multiplatform group. Digital areas such as Podcasts don't even monetize at the same user or per listening hour levels suggesting much higher long-term margins considering the ability to better target ads to users.

Most importantly, the company is still forecasting adjusted EBITDA to reach the 2019 levels during the current quarter. Due to high debt levels, investors have to focus on the profit and cash flow picture with growth at all costs not an option.

Ultimately, iHeartMedia forecasts the Multiplatform Group will eventually match 2019 revenue levels while the Digital Audio Group eventually matches the Multiplatform group. Even at current levels, the Digital Audio group would make the company ~20x% bigger with the long-term goal of reaching double the current revenue size.

The company has the first-party data and the digital ad tech platforms to sail past the privacy issues caused by the iOS changes. The digital audio streaming services and podcasts provide far better brand-safe data for ad targeting making iHeartMedia a preferred ad platform in the new digital privacy world.

Enterprise Surprise

The investment story gets very interesting when the market cap is only $3.0 billion while the EV is up at $8.5 billion. iHeartMedia is already forecasting the adjusted EBITDA margins of 2019 setting the company up for the future cash flows to reduce the net debt levels providing a nice surprise for the enterprise value.

As the stock soared from the lows entering 2021, the EV is only up 40% while the stock has more than doubled. iHeartMedia could double again to $44 and the EV would only reach $11.5 billion for a minimal 35% gain.

IHRT enterprise value
Data by YCharts

As the company potentially doubles revenue in the next few years due to digital/podcasting growth, the company can multiply the FCF generated. iHeartMedia already produced $45 million in FCF in the last quarter even with elevated capital spending due to the real estate consolidation plan.

At the same 27% adjusted EBITDA margins of 2019, EBITDA will surge from $1.0 billion in 2019 to much, much higher levels over the next few years. Just on the 2022 revenues estimates now up at $4.0 billion, adjusted EBITDA reaches $1.1 billion. Up at 30% EBITDA margins due to the cost savings initiatives, the adjusted EBITDA tops $1.2 billion.

The stock valuation is very minimal here with these levels of EBITDA. The key is pushing the FCF higher in order to really start paying down debt. The company has plans for normalized FCF topping $400 million in 2022 and a better operator should top those levels. iHeartMedia can cut the EV in the process and lower the valuation multiple from debt repayments with this FCF alone.

This combination of growing cash flows while repaying debt provides a powerful upside potential for the stock where the market has mostly written off the company due to a traditional focus on broadcast radio. The stock only trades at ~2.5x 2022 EBITDA targets while the EV is a minimal 7.7x.

Takeaway

The key investor takeaway is that iHeartMedia is far too cheap on this dip back down to $22. The media company has the digital strategy to succeed while the FCF will help cut the EV to provide another major catalyst for the stock. Investors should use the weakness to load up on iHeartMedia.

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.


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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in IHRT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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