Not Until 2009 for Radio One
Radio One, Inc. (
ROIAK) is diversifying into businesses outside its core radio operations, which in the longer-term could offset the effects of radio's secular decline. Together with
Comcast (
CMCSK), the company started African-American cable TV network, TV One, which is expected to be cash-flow positive in 2008. It is also investing in online content and an Internet portal. However, meaningful contributions from cable, content, and Internet investments will not likely happen until 2009, in our view, and acquisition possibilities are limited by the company's highly leveraged capital structure. The leverage ratio stands at 7.6x.
Meanwhile, Radio One's near-term outlook is weak as Spanish-formatted broadcasters continue to take away market share, with Los Angeles being particularly hard hit. Although the radio station in Los Angeles has been reformatted, we think it will take at least a few quarters for ratings to improve. Radio One's 4Q07 adjusted EBITDA declined 37.1% year over year to $20 million. EBITDA margin shrank 1,290 basis points to 25.6% in 4Q07 from 38.5% in 4Q06, as sales declined and the company experienced operating de-leverage.
Station operating income declined 26.3% to $27.8 million, as station margins contracted 1,030 basis points to 35.6% in the reported quarter from 45.9% 4Q06. At the end of 4Q07, total debt (net of cash balances) was $791.3 million, the leverage ratio was 7.58x, and stockholders equity was $633.1 million. Cap ex for the quarter was $4.8 million and for the full year was $10.6 million. We maintain our Hold recommendation for the company albeit with a reduced price target of $1.25.
Upside for Esterline Technologies
The Aerospace/Defense Sector - of which Esterline Technologies (ESL) is a part - is entering the sweet spot of this cycle. Commercial deliveries of new models (i.e., the A380, 787 & A350) have yet to start in earnest, while deliveries of more mature marks continue apace. Further, maintenance, repair and overhaul (MRO) of both commercial and military equipment is at a heightened level because of increased usage, which engenders a vibrant after-market.
First quarter 2008 net earnings included a $6.9 million in tax benefits and a $1.9 million gain associated with the termination of an interest rate swap; first quarter 2007 net earnings included a $2.1 million tax benefit. ESL's management raised its full-year earnings per share guidance to a range of $3.35 to $3.50, partly to account for the one-time benefits, but also to reflect an improving outlook. Revenues in the quarter were somewhat better than anticipated due to the timing of a shipment of countermeasure flares.
As robust levels of revenues and income are envisioned for ESL over the balance of the decade, we continue to believe that it should be considered for purchase, especially now that there are indications that its margins can improve, something hoped for by many investors. The average P/E for the aerospace/defense suppliers group is 15.5.
