Valuation: Clear Channel Communications (CCU)

Company Profile:  Clear Channel Communications, Inc. (CCU) (obtained via Google Finance)

Clear Channel Communications, Inc. is a diversified media company with four segments: radio broadcasting; Americas outdoor advertising; international outdoor advertising, and other, which contributed 52%, 19%, 22% and 7%, respectively, of the Company’s total revenue, during the year ended December 31, 2006. The Company owns 1,176 radio stations and a national radio network operating in the United States, and also owns or operates approximately 195,000 Americas outdoor advertising display faces and approximately 717,000 international outdoor advertising display faces. In addition it had equity interests in various international radio broadcasting companies. In 2006, the Company’s subsidiary, Clear Channel Outdoor Holdings, Inc., completed the acquisition of Interspace Outdoor Advertising. The Company also acquired radio stations, a music scheduling company, and Americas and international outdoor display faces and additional equity interests in international outdoor companies.

Business and Management Review 

1) Is the business simple and understandable?
Clear Channel is in the business of advertising and radio communications.  The company is diversified within its strategic operational plan through different advertising mediums and only focusing half of its business on radio communications.

2) Does the business have a consistent operating history?
The company began as a radio communications firm and has remained such ever since 1972.  Television has also been a traditional operation of Clear Channel since 1988.  With over 30 years of a focused business (hasn’t significantly strayed away from advertising), it is clear the company has maintained a consistent operating history.  Financially the company has seen some difficulty, but overall it has been moderately consistent.

3) Does the business have favorable long term prospects?
As there are more than 13,000 radio stations in the United States alone, even if that number is split in half over the next 25 years due to newer technology, Clear Channel would still be in a position to grow domestically let alone internationally.  Therefore, the company does have favorable long term prospects.

4) Is management rational?
One of the founders, Lowry Mays, is still Chairman of the company, and it appears he has hired his sons as CEO and President/CFO.  Though we frown on nepotism, this may not be the case in Clear Channel Communications.  Both of the sons have extensive experience outside of the company.  Since there are no further issues of concern regarding management’s rationality, we are left to assume that management has behaved rationally. 

5) Is management candid with its shareholders?
The company has an impressive investor relations page, complete with an interesting set of rebuttals to myths about the company and industry.

6) Does management resist the institutional imperative?
We find no reason to believe the management is following the institutional imperative.

Financial and Value Review

1) Size of firm
The market cap of Clear Channel Communications is $18.84 billion.  Pass.

2) Strong financial condition
The company’s current ratio is about 1.08, far below the 2.0 requirement.  Fail.

3) Earnings stability
The company has not had a consistent positive net income for over 10 years.  Fail.

4) Dividend record
Clear Channel Communications has not consistently paid a dividend for over 10 years.  Fail.

5) Earnings growth
Earnings have grown more than 1/3 over the last 10 years.  Pass.

6) Price to earnings analysis
With a PE ratio (using our Methods) of 25.26, the requirement of under 20 is not met.   Fail.

7) Price to assets analysis
The Price to Book ratio for Clear Channel Communications is 2.27, lower than our 2.5 limit.  The multiple of PE to PB is higher than our requirement of 50.  Fail.

Having passed only 2 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Clear Channel Communications is suitable for the defensive investor.

1) Strong financial condition
The company’s current ratio is below 1.5 and debt to net current assets is greater than 1.1.  Fail.

2) Earnings stability
The company has achieved a positive net income for over 5 years.  Pass.

3) Dividend record
The company currently pays a dividend.  Pass.

4) Earnings growth
Earnings are greater today than they were 5 years ago.  Pass.

5) Price
The price is not less than 150% of the net tangible assets.  Fail.

We find the company to be unsuitable for the enterprising investor, having passed 3 out of 5 tests.

Our valuation model finds a fair value to be around $25. 

Since the company is currently trading at about $38, we feel it is overvalued at the present time and would not be a suitable investment for the defensive or enterprising investor.

None of the staff of held a position in Clear Channel Communications at the time of publication.  Also, please read our disclaimer and Our Methods.

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