By Sam Boughedda
Morgan Stanley analyst Benjamin Swinburne downgraded Lamar Advertising (NASDAQ:LAMR) from Overweight to Equalweight with a price target of $103 from $135 and iHeartMedia (NASDAQ:IHRT) from Equalweight to Underweight with a price target of $11, down from $25 on Friday.
The analyst downgraded the stocks based on lower expectations for ad growth in 2023 to reflect the rising risk of macro headwinds.
"Our bear case now reflects a mild recession. Decelerating ad growth with recession risk also suggests downward pressure on multiples," said Swinburne. "We see rising risk that ad budget growth will slow and perhaps dramatically in ‘23. As a result, we are lowering our estimates and our price targets."
The analyst outlined three reasons for the IHRT downgrade, including the combined risk of a possible recession and iHeart's levered business model creating outsized risk to the equity, its core high-margin broadcast radio business being "structurally challenged by shifting consumer listening habits," and impressive digital audio growth ahead at iHeart, that "carries a lower margin than the core broadcast business."
"We are ~20% below consensus now on '23E adjusted EBITDA. With lower estimates we lower our base case PT to $11 or 6.5x EV / fwd EBITDA. We also lower our bull and bear case to $20 or 7x and $4 or 6x, respectively," said the analyst.
Regarding Lamar Advertising, Swinburne wrote that they "take into account the growing risk that ad budget growth and marketing spend will slow in '23."
"Given the high incremental operating margins of its billboard business, slower advertising growth flows through to EBITDA and AFFO. We now see flattish '23 diluted EPS and AFFO in our base case. We lower our base case PT to $103 or ~15x EV / fwd EBITDA and ~14x P / fwd AFFO. We also lower our bull and bear case to $125 or 16x EV / fwd EBITDA and $75 or 13x EV / fwd EBITDA."
iHeartMedia shares plunged more than 10% Friday, while Lamar Advertising stock has tumbled over 4%.