Sam Boughedda

Benjamin Swinburne, Morgan Stanley analyst, downgraded Lamar Advertising from Overweight (NASDAQ:), to Equalweight (with a target price of $103 instead of $135) and iHeartMedia from Equalweight (NASDAQ:), to Underweight (with a target price of $11) from $25 Friday.

To reflect rising macro risks, the analyst downgraded stocks on the basis of lower expected ad growth for 2023.

“Our bear case now indicates a mild downturn. Swinburne stated that a slowdown in ad growth coupled with recession risk could also indicate downward pressure on multiples. “We see rising risk that ad budget growth will slow and perhaps dramatically in ‘23. We are therefore lowering our prices targets and our estimates.

Three reasons were cited by the analyst for IHRT’s downgrade. These included the risk of a recession, iHeart’s leveraged business model creating an outsized risk to equity, the “structurally challenged” core radio broadcasting business, which is “structurally challenged” by changing consumer listening habits, and the impressive digital audio growth at iHeart that “carries a lower profit margin than its core broadcast business.

According to our current consensus, we are now 20% lower on ’23E adjusted EBITDA. Lower estimates result in a lower base case PT of $11 or 6.5x EV / fwd EBITDA. Analyst said that we also reduced our bear and bull cases to $20, 7x, and 4x respectively.

Swinburne said that Lamar Advertising takes into account “the growing risk that ad spend growth and marketing expenditure will slow down in ’23.”

Due to the billboard company’s high operating margins, advertising growth is slower than expected. EBITDA or AFFO are affected by this. In our base case, we now have flat ’23 diluted EPS (AFFO) figures. Our base case PT is now $103, or 15x EBITDA / FWD EBITDA, and 14x PE / FWD AFFO. Our bull and bear cases are also reduced to $125, 16x EBITDA / Fwd EBITDA and $75 respectively.

Shares of iHeartMedia plunged by more than 10% on Friday while Lamar Advertising shares fell over 4%.