RADIO ONE STOCK PROBLEMS

Radio One Takes a Long View
By Jerry KnightMonday, March 6, 2006; Page D01
Back when Radio One Inc. began buying radio stations, hip-hop was unheard music.
Not unheard of, but unheard on the radio in many major cities.

Radio One put hip-hop and other genres of urban music on the nation's airwaves. Buying underperforming radio stations and turning them into urban-music machines, the Lanham-based company became the largest black-owned, black-oriented radio station group in the country

Today, hip-hop is everywhere. Yesterday's obscure rappers are today's movie stars -- Mos Def upstaged Bruce Willis in "16 Blocks," one of last weekend's movie openings. Stations catering to white kids play what was once considered the blackest music since the blues.
That is one of the problems facing Radio One.
As urban music has gone mainstream, Radio One stock has lost close to two-thirds of its value in the past two years. The shares hit a five-year low of $8.13 on Thursday and closed 9 cents higher on Friday.

The biggest losers in that slide have been Radio One Chairman Alfred C. Liggins III and his mother, Cathy Hughes, the longtime Washington broadcaster who founded the company 25 years ago. Together, their holdings of four classes of Radio One stock add up to an 18 percent stake in the company. Even at today's depressed stock price, their share is worth about $155 million. But since they control the majority of the voting stock, their stake is probably much more valuable than that -- particularly if the company were to be sold.

Radio One's stock price has fallen because the company's original strategy of picking up out-of-favor radio stations on the cheap and giving them new music, new audiences and new advertisers has run its course.

"They have applied their specialty, which is the urban niche, and they have brought these stations up to a solid operating level,'' said analyst Maurice C. McKenzie of Friedman, Billings, Ramsey Group, an Arlington investment firm. "At this point, they are struggling with a challenging radio environment."

There are few bargain radio stations to be had these days. Few cities don't already have stations following what was once the innovative format of Radio One. And the core urban-music franchise is fragmenting, with Latino youths switching from "conventional" hip-hop to the Caribbean-influenced sound known as reggaeton.
Instead of buying more stations, Radio One has been buying back its stock. That can increase earnings per share and sometimes the stock price but often can sacrifice expansion opportunities.
Despite repurchasing $78 million worth of shares, Radio One stock has done badly even by radio standards, McKenzie noted. The stock underperformed the industry last year and continues to do so.
Not that the radio industry has been doing well. Listeners are being lured away by the Internet, iPods and the expanded choices offered by District-based XM Satellite Radio and its New York rival, Sirius Satellite Radio. (Radio One programs one of XM's 100-plus channels.) Stocks of satellite broadcasters aren't doing better than those of the earthlings. XM is down 21 percent so far this year, Sirius 25 percent.
In that environment, radio revenue is growing only 3 to 5 percent a year. Radio One's revenue grew by a scant one-tenth of 1 percent in the fourth quarter of last year and could actually fall this quarter, analysts said.


Radio's problem, Liggins said on a recent conference call, is that "we're not creating new advertisers, which as an industry we need to do."
The frustration of Liggins and other Radio One executives blared as a backbeat during last month's hour-long session with analysts. They sounded frustrated trying to make money in a mature industry, frustrated by the cutthroat competition for advertising dollars, frustrated by what's happened to Radio One's stock price, frustrated by Wall Street's unwillingness to embrace the company's diversification into television broadcasting and program syndication.
Radio One's most promising move beyond its radio roots is TV One, a joint venture with Comcast Corp. Radio One owns a 35 percent stake in the TV venture, which aims to rival Black Entertainment Television, a network created by Robert L. Johnson, Washington's most successful minority entrepreneur.

Expanding slowly across Comcast's vast web of cable networks, TV One is on track to generate $80 million a year in cash flow within five years, Liggins said.
But Wall Street gives the company little credit for its move into TV, even though the strategy was suggested by media industry investment bankers.

"We played the game just like we were supposed to," Liggins lamented. "We ended up with the stock price where it is, based on doing everything we were told to do."
Becoming a minor partner in one of the several bidders for the Washington Nationals franchise and making an effort to break into movie distribution with an obscure indie film also generated a lot of skepticism.

More interesting to investors is Radio One's partnership with talk show host Tom Joyner, the nation's top black radio personality. Joyner's show is broadcast on several Radio One stations and syndicated to stations owned by other companies.

The partnership in turn is lining up other black talk-radio hosts -- Al Sharpton among them -- to build the first talk-show network aimed at black audiences. Distributing programming isn't considered as good a business as running stations, but black talk radio is a wide-open field, just as urban music was a decade ago.
Also regarded as a promising diversification possibility is Radio One's effort to develop a major Internet portal for African Americans. Others have tried, none with great financial success.

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Radio One Takes a Long View
Analysts generally applaud efforts to find new ways to reach Radio One's audience. "Radio One is proactively capitalizing on this trend with its focus on becoming a multimedia powerhouse for the African American demographic," analysts at Wachovia Capital Markets LLC noted approvingly in a recent research report.
Nonetheless, Wachovia cut the stock's rating from "outperform" to "market perform, " the equivalent of a "hold" rating.

From talking to analysts and reading their research, it becomes clear that most agree on the prognosis for Radio One: It could be a good investment down the road, but the future is not now.
FBR's McKenzie, who has the equivalent of a "hold" rating on the stock, said: "Long-term, these diversifications could prove successful. But in the near term, we expect resource allocation to have a negative impact on the company's margins." In other words, it's going to cost money to get those new ventures off the ground, and in the meantime, profit will suffer.
Analysts at Stifel, Nicolaus & Co. say investors would get a quicker payoff if Radio One were sold. They express regret that Radio One's "management isn't overly concerned with short-term stock price."

Liggins dealt with that complaint during his February conference call. "We are more concerned about actually creating value than what the Street is going to think. They think three- to six-month return. I'm more concerned about how much more cash flow we're going to have in five years."
That's an attitude that ought to appeal to long-term investors -- if there are any left.
Jerry Knight's e-mail address isknightj@washpost.com