iHeartMedia’s stock price has taken a beating over the past six months, shedding 62.3% of its value and falling to $1.58 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy iHeartMedia, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why do we think iHeartMedia will underperform?
Even with the cheaper entry price, we’re passing on iHeartMedia for now. Here are three reasons why there are better opportunities than IHRT, plus one stock we’d rather own.
1. Long-term revenue growth disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, iHeartMedia’s sales grew at a weak 4.2% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.
2. Breakeven free cash flow limits reinvestment potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
iHeartMedia broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.
3. High debt levels increase risk
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’s $5.76 billion of debt exceeds the $174.4 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $669.2 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. iHeartMedia could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope iHeartMedia can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final judgment
We cheer for all companies serving everyday consumers, but in the case of iHeartMedia, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 7.4× forward EV-to-EBITDA (or $1.58 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
Stocks we like more than iHeartMedia
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