The overvalued company of the week is Clear Channel Communications Inc. (CCU). We will analyze using Warren Buffett’s approach for the Business and Management Review as well use Benjamin Graham’s model of valuation of a company.
Business and Management Review
1) Is the business simple and understandable?
Clear Channel is the operator of roughly 1,100 radio stations within the United States. Its other business lines include outdoor advertising both internationally and domestically. Their radio stations are fairly easy to understand, as it is driven by advertising dollars paid during the commercials. The value the advertiser see’s is that the radio station is ranked highly in industry rankings and targets the same audience as the advertiser. The outdoor advertising is done through the ownership of billboards and other public displayable assets that can be rented for periods of time.
2) Does the business have a consistent operating history?
All figures concerning the company have been unpredictable, especially sales and net income which have scattered across the board in recent years. We feel this is primarily due to increased competition in the marketplace as well the emergence of different types of media for delivery of the same content. Part to blame of these figures was the spin off of its live entertainment division in 2005, but the main driver for the company is its radio stations.
3) Does the business have favorable long term prospects?
We feel that the increased competition will hinder the capabilities for Clear Channel to clearly distinguish itself, and thus will loose the listening audience. Apple’s Ipod is a main competitor the industry could not have seen coming as it has transcended to compete with radio in American’s automobiles. Even more recently the increase, although slow, of satellite radio has taken even more away from both the industry and Clear Channel. The figurehead of satellite radio is of course Howard Stern, and although he himself will not destroy terrestrial radio he has succeeded in drawing unprecedented attention to the options the listening public.
4) Is management rational?
We feel that management has accepted the fact that the landscape of the industry is changing. However, Clear Channel needs to figure ways of becoming more competitive in gaining and retaining the listening audience, and increasing ad revenue for the company. Ultimately unless Clear Channel changes some aspects of their company they will continue to receive their portion of an ever decreasing market share.
5) Is management candid with its shareholders?
We feel that Clear Channel speaks openly with their shareholders. Particularly interesting in their investor relation page is the ability to request information from the company and have it sent. Other than that feature, all the standard information we have come to expect is present
6) Does management resist the institutional imperative?
We can find no reason to suspect that management is not resisting the institutional imperative.
Financial and Value Review
Upon review of Clear Channel, we find this stock to be unsuitable for both the enterprising, as well defensive investor. The lack of consistent positive net income for the past ten years and the lack of dividend payments eliminate this from the defensive investor’s portfolio. The lack of a strong current ratio and positive net income for the past five years discredits this from the enterprising investor. The P/B is a strong 1.51, but the P/E is rather high at over 23 (Our Methods).
We would not feel comfortable buying this stock for more than $26 per share.
Neither of us held a position in Clear Channel at time of publication. Please review our disclaimer, and our methods.
Clear channel has gone from 26 (when you declared it to be too high) to 35 per share only three weeks later. That was a stunningly bad call!
# Posted by: Mike at November 18, 2006 05:25 PM