What a time it’s been for iHeartMedia. In the past six months alone, the company’s stock price has increased by a massive 52.9%, reaching $2.14 per share. This performance 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? Get the full stock story straight from our expert analysts, it’s free.
We’re glad investors have benefited from the price increase, but we don't have much confidence in iHeartMedia. Here are three reasons why there are better opportunities than IHRT and a stock we'd rather own.
Why Do We Think iHeartMedia Will Underperform?
Occasionally featuring celebrity hosts like Ryan Seacrest on its shows, iHeartMedia (NASDAQ:IHRT) is a leading multimedia company renowned for its extensive network of radio stations, digital platforms, and live events across the globe.
1. Long-Term Revenue Growth Flatter Than a Pancake
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, iHeartMedia struggled to consistently increase demand as its $3.80 billion of sales for the trailing 12 months was close to its revenue five years ago. This fell short of our benchmarks and signals it’s a low quality business. 
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 typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Over the last few years, iHeartMedia’s ROIC averaged 4.3 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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 $6.01 billion of debt exceeds the $431.8 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $667.6 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
iHeartMedia falls short of our quality standards. Following the recent rally, the stock trades at 0.4× forward EV-to-EBITDA (or $2.14 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d recommend looking at TransDigm, a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Like More Than iHeartMedia
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