3 Reasons to Avoid IHRT and 1 Stock to Buy Instead

iHeartMedia has had an impressive run over the past six months as its shares have beaten the S&P 500 by 27.8%. The stock now trades at $2.20, marking a 37.5% gain. 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? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think iHeartMedia Will Underperform?

Despite the momentum, we're cautious about iHeartMedia. 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 sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, iHeartMedia grew its sales at a sluggish 3.6% compounded annual growth rate. 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 $13.21 billion of cash over the last year, and its $5.90 billion of debt exceeds the $235.9 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. With its shares beating the market recently, the stock trades at 0.5× forward EV-to-EBITDA (or $2.20 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. Let us point you toward the Amazon and PayPal of Latin America.

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