Static for Emmis Communications
We think industry fundamentals remain weak and Emmis Communications Corporation (EMMS) will be particularly hard hit from the current transition to electronic ratings. Earnings from the New York and Los Angeles radio operations, which together account for half of domestic radio revenue, or roughly 38 percent of total revenue, appear set to continue falling. The management does not foresee any near-term recovery in these markets.
Initial Arbitron electronic ratings for the New York stations fell roughly 40 percent, in line with other urban and Hispanic formats in New York. While Arbitron may tweak its samples, in the near-term we think the electronic ratings rollout will accelerate the decline in domestic radio revenue.
The radio industry is undergoing both a secular and cyclical downturn. Industry revenue has grown at an anemic Compound Annual Growth Rate of just 1% over the last seven years. We expect 0-2% growth to continue through 2009, slowed by weak macro ad spending and few near-term incentives for advertisers to return to radio from other mediums, primarily the Internet.
Mired in a secular downturn, Emmis has recently re-evaluated its assets, divested all of its TV stations; refinanced its debt at lower rates; and returned capital from station sales to shareholders through dividends. We expect these efforts to hone the management's focus on the radio and publishing operations, significantly reduce the company's cost of capital, improve cash flow, and bolster return on equity. We keep our Hold rating with a six-month target price of $2.85.
Kroger Outperforms, Stays a Hold
Kroger Co. (KR) reported better-than-expected results for the first quarter but maintained the high end of its fiscal 2008 EPS guidance. We are increasing our sales and earnings estimates to reflect the upside in the first quarter.
The combination of company's low prices and private-label brands are leading to market share gains and driving the company's results. Still, we remain concerned with Kroger's contracting gross margins and rising food and energy prices that could cause consumers to trade down from Kroger stores. The stock looks fairly valued at current levels. We maintain our Hold rating.
We expect further operating cost improvements that should enable the company to generate an operating margin of 3.34 percent in fiscal 2008 and 3.41 percent in 2009. Kroger has also used the cash flow generated from its solid sales growth and steady operating margins to improve its balance sheet and return value to shareholders.
However, inflationary pressures, and labor issues continue to be our concerns. Not only has the business become too price sensitive, most of Kroger's workforce is represented by a labor union, which could put upward pressure on wage expenses.
Kroger shares are trading at 14.5x our fiscal year 2008 EPS estimate and 13.1x our fiscal year 2009 EPS estimate.
