Frank Boyle: Perfectly Frank [5/12/03]
By Reed Bunzel
Growing up in a Radio family, Jim Boyle ó managing director and senior vice president at Wachovia Securities ó was known simply as "Frankís kid." His father, Frank Boyle, was chairman at Eastman Radio, which meant that the family lived, breathed, ate and slept with Radio.
"Growing up in a Radio family, I couldnít have avoided hearing about and learning the business if Iíd tried," Jim Boyle says. "As I grew up, whether it was around the dinner table or elsewhere, I just heard nothing but Radio stories about Radio people. Weíd also get these little gifts: WMCA Good Guy sweat shirts, station coffee cups, T-shirts, air-check tapes, or records that we hadnít heard yet. The conversation was just Radio, Radio, Radio. When we were older and had moved to New York, we occasionally would go on weekends with Dad into the Eastman Radio office in New York. I got to know the business from that angle because, essentially, his clients were everyone at one time or another ó Cap Cities, Harte-Hanks, NBC, Susquehanna, ABC, Park, Intermountain, CBS, Cox, Buckley, Greater Media ó all of the groups."
So what does a young man inundated with Radio do when he grows up? He goes into cable, of course. "I realized that my father was so well-known and well regarded that, if I went directly into Radio, it was no-win," Boyle recalls. "I would always get twice the blame, half the credit. So like most contrary kids, I went in another direction. I stayed in media, but started to work in cable at the Cable Advertising Bureau. I did cable for 11 years in a variety of positions and business there, and then shifted to Wall Street."
Boyle landed on Wall Street nine years ago, working as a media generalist at First Manhattan and moving to Deutsche Banc Alex. Brown before joining Wachovia. He currently covers the Radio, television and outdoor industries, focusing specifically on Clear Channel, Cox Radio, Cumulus Media, Emmis Communications, Radio One, Saga Communications, Gray TV, Hearst-Argyle TV, Lamar Advertising, Sinclair Broadcasting, and Young Broadcasting.
INK: To what degree did growing up in a Radio family help you when you first landed on Wall Street?
BOYLE: I found out fairly quickly that most of the analysts are very smart, hardworking, young, freshly-minted MBAs who were new to the industry. When I started interviewing, I was told very quickly that the fact that I came out of the industry was much more important than the fact that I knew little about the insides of Wall Street. "We can teach you Wall Street; teaching someone an industry takes much longer," they said. When I sit down with brand-new clients, I tell them that, out of the 25 Radio analysts, Iím the only one who has ever worked in the business ó and my family has been in the business for over 45 years. And I tell them they should listen to me because, at the end of the hour, I can tell them three things they donít know." I havenít hit a client yet that I havenít delivered on that promise.
How many companies do you currently cover?
I formally cover 12 companies, and I will be expanding coverage by another six or seven companies. When you cover a sector or sub-sector, you formally cover certain companies and carry estimates on them and frequently publish notes and opinions. You also have to keep track of and be aware of all the other players in the business, public or private, because they often have an impact on, or can tell you something about, a particular company or industry trend.
Is it difficult to get a good grip on Radio valuations, considering the great fluctuations in the marketplace over the last three years?
Neither the perfect storm of 2001 nor the nirvana of 2000 is an appropriate comparison, nor is it close to the historical mean of most valuations. To put it in context, at the start of deregulation, the Radio industry traded around 20 times on a price/free cash flow (P/FCF) basis, which is probably the most-looked-at benchmark these days. At the beginning of 1999, the dot-com surge started, and there was a bull market economy, along with lower interest rates. For the first time, Radio was starting to put together clusters and crank them up to that next level of operational efficiency and externally competitive scale. By late 1999, the industry was trading around 40X. Three to five months after that, we hit the peak, and Radio was trading just below 60X. Then investors realized that the comparisons were going to be very difficult, combined with a possible recession; and that drastically pulled down the public valuation multiples. If you look at the average since deregulation ó and if you strip out that dot-com bubble ó the average is around 26.5X P/ FCF.
In what range is the industry trading today?
Around three months ago, it was back near the 26.5X average since deregulation. But in the last few months, the war rhetoric, which eventually turned into a war, and the possibility of a double-dip recession lowered valuations again, so currently weíre seeing about 21.5X. Radio has always been very economically sensitive. Itís known as first-in and first-out of recessions, due its very short-term aspects with advertisers. Itís very easily tweaked, both for good and bad. Now the bigger debate is how fast or big the economy might come back.
Weíve already seen how the war has trimmed some groupsí Q1 revenues, and that could extend into Q2, as well. How will this affect Wall Streetís interest in Radio stocks?
Whether they made or missed their numbers for Q1 guidance, Radio companies are going to get across-the-board "mulligans" because there was a war. We have already trimmed back our estimates twice. Other analysts have, too. What this means is that many analysts have upside to raise estimates if the economy rebounds ó they have dry powder. Much of the ad budgets that got moved to the sidelines because of the war may now move off those sidelines and come into play. If the Radio business and the better companies start to turn it around in June, then that is what the near-term investors will jump on.
Of course, the flip side also could occur...
Youíre right. Maybe those dollars will never come back. Maybe advertisers and consumers are happy that the Iraq war is another contemporary American war of four weeks or less; but now weíre left with the economy, which has been in a slow-motion, jobless recovery. That very easily could keep advertisers and investors in the same mindset of "Gee, Iím not sure where this is going, so Iím not going to place my big bet yet. Iím just going to place a middling bet."
Are long-term investors more likely to get back into Radio ahead of the short-termers?
The long-term investors are going to be in a more acceptable frame of mind. Not only will they give Radio groups "mulligans" in Q1 and also in Q2, because the war affected both quarters, but they will also gauge the long-term trends, which continue to be very beneficial to most of the Radio groups. Theyíll be able to sit there and say, "These are compelling valuations, and even though Iím going to have roller-coaster volatility, Iím just going to place my investments and let them ride. If I have veteran Radio management with well-positioned clusters ó not too much debt on the balance sheet ó and if Radio takes share from newspapers and continues to convert a high percentage of free cash flow, these are very good stocks compared to the other things I can buy." Remember: Radio is not really competing against each other on Wall Street, just as it shouldnít with advertisers. On Wall Street, Radio is competing against other media and all the other stocks, bonds, commodities, T-bills ó anything that an investor can put money in.
In a recent issue of ours, Jason Jennings says that one of the biggest mistakes a company can make is to give guidance to Wall Street. Whatís your take on this?
Guidance by public companies has certainly caused a certain amount of bipolar discussion. Many years ago, there was no such thing as guidance. In fact, Ben Graham, the famous value investor after whom Warren Buffet patterned his style, went beyond that. He thought you should have no contact with a company. You should not talk to them; you should not visit them; you should not read their self-serving press releases. You should merely look at their numbers and in the most dispassionate, bloodless way, calculate whether or not this is a good investment value. Warren Buffet recently has said that he doesnít think guidance is a useful item, and many companies have listened to him ó and he sits on the boards of several companies.
How complicit was advance guidance in creating the accounting scandals that hit Wall Street in 2001 and 2002?
Each company had a different shade and magnitude of greed and problems. Some of the executives who did questionable or wrong activities may have done so because they were trying to keep the momentum and heated enthusiasm going for their companies. It seemed all of them followed a slightly different recipe on how they did that, and how they presented a picture to not only Wall Street, but also to investors and to the business and consumer press. As it turned out, many of those corporate executives simply lied to everyone ó analysts, journalists, investors, their accountants. In some cases, they even lied to their boards of directors and their employees. Itís very unfortunate for all involved or hurt by the wrongs, which were not widespread, but they werenít isolated either.
Do public Radio operators obsess too much about their share price when they should, in fact, be watching their operations?
Brand-new executives of publicly-traded Radio seem to take half a year to a year to learn that you cannot focus on your stock price every day. Itís a different snapshot every minute, and you canít control it. If your business runs well over the long term, eventually your share price has to reflect that. If you donít run your company well ó but you are a very smooth-talking CEO ó in the long run, your companyís share price will not represent the smooth-talk and promises that can bolster stocks short term. The stock price will represent the lower revenue growth and lesser operating margins, which are not as good as the initial perception and promises, so the stock will eventually trade at an appropriately lower multiple.
But it still must hurt when Wall Street doesnít reward good, solid management with a good, solid share price.
Itís important to remember that on Wall Street we are talking about stocks, not companies. The company is obviously attached to the stock, but sometimes the price can get out of whack. Wall Streetís big misperception about Radio is that not all groups are created equal, not all station facilities are created equal, and not all lengthy Radio rťsumťs are created equal. Sometimes, the Streetís analysts seem to move to Lake Woebegone, where all the children are above average. At the end of the day, the investors wonít sit there and say, "Find me a good company." Theyíll say, "Find me a good stock. Find me a way to make money."
What factors do you consider when evaluating a Radio company or its stock?
I look at past track record and at reasonable future prospects. Whether itís the companyís management or the properties, I want to have a good feel for how they fit into the big picture ó how they have performed, how they are likely to continue to perform, even though there are assuredly no guarantees. Although track records occasionally are broken or fall apart, sometimes they get surprisingly better. In Radio, which is one of the most highly management-intensive of the media, you also want to get to know that management beyond their conference calls and their PowerPoint presentations. You find out their reputation from their industry peers and their track record in similar situations.
I also have to stay on top of the various macro economic data: new auto sales, home sales, retail sales, business confidence, durable orders and employment. There are leading indicators; there are lagging indicators. There are a lot of pieces to the jigsaw puzzle, and they often contradict each other or merely muddy the picture. But the Radio industry, for all of its marvelous people and its heartfelt passion, does not operate in a vacuum, therefore you have to look at the big picture as well.
Why is it that some analysts downgrade very strong companies and give "buy" ratings to others that might not operate as efficiently or profitably?
One big misperception the Radio industry has about Wall Street is that the companyís stock price does not necessarily have to resemble the company all the time. You could have three of the "four Ps" working for you: you could have very good people, very good properties, and be very well-positioned, internally and externally. But if so many people have been so impressed with the first three Ps that the stock price has been pushed to a too-high multiple, then it may be too rich. You might reasonably downgrade the stock to a lower recommendation, unless there was a countervailing catalyst, even though you still are impressed with the company itself.
Would Cox be a good example of that?
Absolutely. I have downgraded Cox Radio four times in the last five years, solely due to a too-rich valuation. They have very good management, they have the largest average clusters, theyíre positioned in large Sunbelt markets, they have a high percentage of turnarounds, and their audience ratings are frequently headed in the right way. But if, for example, their share price was up 35 percent in a month, whereas the S&P was up only 2 percent, the companyís multiple has swiftly attained too high a premium to reasonably maintain a higher rating, so we drop their rating a notch. That wouldnít mean that Bob Neil and his top-flight team suddenly turned from skilled and smart to slow and stupid overnight. Itís "How much does one pay for the future cash flow prospects?"
Of course, the opposite of that also could be true.
Certainly. You could have a company that doesnít have very good management, properties or positioning; but if the share price is low enough, it might be a very good stock, even if itís not a very good Radio company. If nothing else, you still have FCC licenses, and Radio stations will always be worth a goodly amount of money in the private market. Therefore, if the stock price falls far enough, all of a sudden youíd have a compelling recommendation, even though you could sit there and in your report say, "Iím not very impressed with much of this company relative to its peers, except its stock price."
In general, are Radio stocks currently over-priced or under-priced?
Right now, the industry roughly is trading at 21.5X price/free cash flow. So in that band we alluded to earlier ó a floor-to-ceiling of 20X to 40X ó [Radio is] a lot closer to the floor. Typically, when companies want to go public, they want a better valuation than near the historical valuation floor. There are at least two or three companies that, one might speculate, could consider going public if valuations were improved. Now that weíre coming out of the war, and if the economy recovers nicely, they may get their chance or, as Wall Street would say, the window will open. Street speculation has possible prospects such as Carl Hirsch and NextMedia, Farid Suleman and Citadel, even the Sutton family and Inner City ó but you should ask them.
It appears that the FCC is set to relax media ownership rules on June 2. How might this affect Radio companies?
Radio already got its big Christmas gift in 1996. This time around, television and newspaper will get their Christmas gifts. The gifts probably wonít be quite as big as Radio got in í96, when the business was truly and dramatically changed. Nevertheless, it does appear that Chairman Powell and the two Republican commissioners have said June 2 is the date. They are so late on their biennial-scheduled rules. The courts have tossed out so many of the rules. If they donít do something, there can be no rules. Having listened to the various commissioners at the NAB in Las Vegas, itís readily apparent that, by a consistent three-to-two vote, the Republican commissioners will cram each new rule right past the posturing of the two Democratic commissioners.
One of the ongoing debates during Radio consolidation was whether "dereg" has led to a greater diversity of voices in the media. How will this debate play out in television, which historically has fewer voices to begin with?>
If you look at the FCCís 12 preliminary reports, 10 of them were merger or consolidation friendly. They essentially affirm that there are more media outlets, more owners, and more diversity. The public should see more diversity of programming if the FCC allows better economics in smaller markets. This may be especially true for some of the businesses that have come under distress, such as broadcast TV, which has lost so much audience to cable and satellite.
Has Radioís "Christmas gift" stopped giving, or should we still expect some consolidation in the future?
Thereís still room for consolidation ó just not as much as there was in the last six years ó and [there should be] fewer high-profile deals. In the last two years, with the recession and the lack of available capital, it was very hard for public groups to buy accretively, so we saw smaller deals. From the Wall Street side, same-station growth has always been more important than acquisitions, but consolidation gave it that extra, sustainable juice that rewarded the consolidators in Radio for much of the í90s with a higher multiple valuation. In the last year for almost all businesses, however, Wall Street has been gun-shy over most acquisitions. Investors are much more focused on organic growth. Whether or not consolidation heats up is not as important to a Radio groupís stock price as is the Radio groupís sustainable, internal growth.
How do you see the general economy for the rest of this year ó and for 2004?
We have a large economics group based in Charlotte, and it has current Gross Domestic Product (GDP) estimates skewed to the back end of the year. In 2003, it is estimating 4.1 percent GDP growth, but it has the back half over 5 percent. In 2004, the group sees 5.9 percent nominal GDP. Typically, in an expanding economy, advertising outpaces the nominal GDP. Hence, if the back half of this year is in that 4- to 6-percent range, it shouldnít be unusual for advertising to be up 5 to 7 percent. Radio typically has outpaced general advertising for the last two or three decades, but that accelerated in 1996. So, in the future, if general advertising is 5 to 7 percent, Radio should be in the 7- to 9-percent range ó especially when you get beyond the difficult mathematical comparisons that were caused by last yearís big jump vs. easy comparisons with post-9/11. Additionally, the larger groups tend to outperform the industry by 100 to 200 basis points, so they go up another notch.
Do you think youíll ever shake the industry connection to your father?
Clients often will ask, "How does the industry treat you since youíre related to someone they know?" Itís actually an easy answer: On Wall Street, Iím known as Jim Boyle; but in the Radio business, Iím still Frankís kid. Iím 47 years old and have gray hair, but I am ó and Iíll always be ó Frankís kid. Iím lucky.
Boyleís Top 3 Radio Picks
"Our top three picks in Radio are Radio One, Clear Channel and Emmis, in that order. All three are blessed with veteran management with proven track records. Theyíre also skewed toward large markets, which have a tendency to grow faster and fetch a higher valuation than mid to small markets. In the early economic cycle, the faster national advertising growth should benefit all three.
"Radio One is still laboring under the investor misperception that thereís a huge surge in Urban format competition. But if you look at some of the recent format data, the number of Urban formatted stations peaked about two years ago, and we think Radio One is still likely to grow at a faster rate than the sector. The usual debate has been how much of a premium the company warrants. They currently trade at a discount or par with the industry, so itís an obvious time to buy the stock, because itís trading at an illogical level. From our vantage point, presuming that the surging Urban format competition is indeed a myth, which we believe it is, Radio Oneís stock is poised for the most upside.
"Clear Channel is the only large-cap company in the business. When the powerful mutual-fund money wants to play Radio because they think the business is making a comeback, they pile into Clear Channel. Itís still the bellwether Radio company. Between its considerable Radio and outdoor assets, itís well positioned. Most American media is consumed inside the home, and they fragment each otherís audience. Outside the home is just Radio and billboards, and no one is bigger out-of-home than Clear Channel, both domestically and internationally.
"Eighty percent of Emmisí cash flow is in ó or about to enter ó a sweet spot. Fifteen percent of its cash flow comes from Los Angeles, where KPWR is a strong Number One. Twenty-five percent comes from New York, where its flagship cluster is rebounding four months ahead of schedule after fending off an attack. Thatís a tribute to what Judy Ellis and her team built, and what Barry Mayo has kept revved up. Another 40 percent comes from mid-market TV, which, come June 2, will be worth more and have more profitable economics. So, while some people worry about whether [Chairman/CEO] Jeff Smulyan will buy the Dodgers, it really comes down to what Emmis has done in the trenches and what itís going to have in the near-term. Its current multiple is at a much greater discount than normal, thus we believe itís more enticing."
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