iHeartMedia, Inc. (NASDAQ:IHRT) is limping towards the end of 2023, but the company is set up for great 2024. The broadcast media company is poised to benefit from a rebound in the advertising market and the 2024 U.S. election cycle. My investment thesis remains ultra Bullish on the beaten down media stock with plans to continue repaying debt from positive cash flows.
Surviving Tough Ad Market
iHeartMedia reported another tough quarter in Q2 2023 with revenues down 3.6%. Outside of the political boost from the mid-terms in 2023, revenues were only down 1.8%.
The key is that revenues were only down a minimal amount in the off year for political revenues. The broadcast media space remains tough with revenues down sharply, but the key here is that revenues didn’t collapse with podcast revenues helping to offset the declines.
Even under these tough ad market scenarios, iHeart reported strong cash flows from operations leading to positive free cash flows. Operating cash flows were $57 million while free cash flows were $34 million.
The numbers should only get better in the 2H while 2024, is setting up for blockbuster ad revenues due to a big presidential political cycle. The Q3 adjusted EBITDA target is already $200 million, up from $181 million in Q2.
iHeart produced $316 million in adjusted EBITDA last Q4. A similar amount in Q4’23 pushes the 2023 EBITDA to ~$800 million, far below the original expectation to reach record amounts topping $1 billion by now.
The Q4’22 revenues got a huge boost from the election with an estimated boost of $65.8 million, up $55.3 million from the prior Q4. iHeart won’t see the boost in 2023, but the company is set for a 2024 where the ad market surely rebounds from the 2023 weakness. The election cycle next year provides an even bigger boost to revenues from the U.S. Presidential election plus the much larger digital audio group led by the podcasting segment.
With the large debt levels of iHeartMedia, the media company producing positive cash flows are very beneficial. The revenue rebound next year due to the political ad spending will further help the company repay debt.
iHeartMedia has net debt of $5.15 billion with weighted average cost of debt of 7.2%. Investors clearly want to see the company cut those debt levels and save on the interest expenses now pushing $100 million quarterly.
The media company produced $57 million in operating cash flows in Q2 and the numbers should only improve in the 2H with the better ad market. Though, the numbers were down sharply from 2022 levels.
The stock is interesting due to the high leverage offset by solid adjusted EBITDA and free cash flows. iHeartMedia has a limited market cap currently due to the debt fears and weak ad market.
The upside opportunity only requires a near tripling in the 2024 EV/S multiple from 0.75x to 2.5x in order to reward shareholders with a stock price closer to the mid-2021 highs near $30. The Base case has iHeartMedia rallying to $6.62 and the Bullish case includes a rally to nearly $40. Neither case factors in debt repayment that would further boost the stock price from a reduced EV.
A lot of media stocks currently trade at forward EV/S multiple of 1.5x or higher. Both Paramount Global (PARA) and Spotify Technology (SPOT) trades these EV/S multiples and one can easily see upside to 2.5x in a bull market.
As the chart shows, Spotify traded down to the iHeartMedia multiple last Fall and now the reverse could happen with iHeartMedia trading up to the Spotify multiple now.
The key investor takeaway is that iHeartMedia is struggling now, but the U.S election cycle will provide a timely boost to ad revenues next year. Due to leverage, the stock is very risky providing strong upside, if the business rebounds next year. Of course, the high debt levels leave limited margin of safety for any disruption to the business from a major recession in the next year.
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