The past six months have been a windfall for iHeartMedia’s shareholders. The company’s stock price has jumped 126%, hitting $4.25 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in iHeartMedia, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think iHeartMedia Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on iHeartMedia for now. Here are three reasons why IHRT doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, iHeartMedia’s sales grew at a weak 4.9% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, iHeartMedia’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
iHeartMedia burned through $13.31 billion of cash over the last year, and its $5.87 billion of debt exceeds the $192.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the iHeartMedia’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of iHeartMedia until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
iHeartMedia falls short of our quality standards. After the recent rally, the stock trades at 8× forward EV-to-EBITDA (or $4.25 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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