IHRTB - iHeartMedia: Don't Panic

2023-03-11 08:27:21 ET

Summary

• iHeartMedia reported a solid Q4 with record adjusted EBITDA of $316 million.
• The media company guided to weak Q1'23 revenues due to a tough ad market in the seasonally weak quarter.
• The stock trades at only 6x EV/EBITDA, but the high debt remains a risk.

After another solid quarter considering the macroeconomic environment, iHeartMedia (IHRT) plunged to new lows over a strange reaction to record quarterly adjusted EBITDA. The media company has a much better diversified business to thrive during a weak ad market, unlike during the covid slowdowns. My investment thesis is ultra Bullish on the stock after the dip to $5.

Impressive Holiday Quarter

The December quarter provided a prime example of how iHeartMedia is vastly different from the pre-covid company in financial distress. The Multiplatform Group has struggled to return to pre-covid sales levels and didn't even grow 1% during Q4, yet the media company grew revenues by 6% for the quarter.

The Podcast business has remained a strong part of the growth story, with a nearly 17% sales increase in Q4. iHeartMedia is now a podcast powerhouse with a monthly audience of 33 million, nearly 50% above second place Wondery.

The market didn't like the negative sales guidance for Q1'23, but iHeartMedia is in a far better position now with a much more profitable business to handle the short term ad market hiccups despite the higher levels of debt. January sales were down 1% and the Q1 guidance is for a mid-single digit revenue decline in the seasonally worse quarter.

The stock plunged last week on the week guidance, but the media company did report a quarterly adjusted EBITDA record at $316 million. As per the CEO on the Q4'22 earnings call , iHeartMedia is coming off a strong year after being left for dead during covid:

The fourth quarter was our best quarter for revenue and adjusted EBITDA ever, and on a full year basis, in 2022, we generated the highest revenue and second highest adjusted EBITDA and free cash flow year in iHeart's history.

The key here is whether the media company can maintain adjusted EBITDA at record highs. If so, investors get to purchase the stock at the covid lows despite as vastly better financial picture over the long term.

The company guided to weak Q1 EBITDA after a slow revenue start to the year due in part to internal mistakes. Worth noting, the company guided to Q4'22 revenue growth of 2% to 6% and hit the upper end of the range with the reporting of 6% growth. With the quarter nearly over, investors should latch onto a trend of under promising on estimates.

The pessimistic J.P. Morgan analyst has a price target of $5 on the stock now for a market cap in the $600 million range for a company that just generated $950 million in adjusted EBITDA in 2022. iHeartMedia did forecast a Q1'23 EBITDA target between $80 to $90 million, well below analyst estimates at $133 million.

Improving Debt Picture

iHeartMedia definitely falls into the group of companies hurt by vastly higher interest rates. Luckily, the company is producing much higher cash flows to offset the rate impact.

The debt picture is mixed over the last year is mixed, with iHeartMedia reducing net debt by $309 million during 2022 to $5,078 million. The bad news is that the average cost of debt rose 150 basis points during the year to 6.9%.

The company paid interest expenses of $93 million during Q4'22, up from $80 million during the prior year period. The good news is that iHeartMedia has been able to repurchase debt at a discount, including $141 million in principal balance of 8.375% Senior Unsecured Notes (at a discount to par) for $126 million in cash.

The current weakness in the stock should lead to even more debt discounts in the year ahead.

Takeaway

The key investor takeaway is that iHeartMedia is a strong player in the digital media space now. The company faces a tough ad market, but the business will rebound.

The stock only has an enterprise value in the $5.7 billion range, coming off a year of $950 million in EBITDA profits. iHeartMedia will struggle to top this level in 2023, but the stock has substantial upside in a more normal economic climate. iHeartMedia would have to rally to $36 to trade at a 10x EV/EBITDA multiple based on a baseline adjusted EBITDA target of $950 million, while the company has goals for record EBITDA in the future.

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