Pandora (P) is a 'Gift' As Competition Fades - Macquarie

Macquarie analyst, Amy Yong, believes Pandora (NYSE: P) has a rare opportunity to become the dominant force in music as competition from radio giants Cumulus and iHeartRadio is dwindling due to overly levered balance sheets and choppy local ad trends. Failing competition should boost internal metrics and in turn the stock price. No change to the Outperform rating or $17 PT.

Apple has cut back its Apple Music marketing as it re-focuses on the launch of TV. Apple will also be discontinuing free streaming service iTunes Radio Jan 28th, forcing users to either pay for Apple Music (~US$10/month vs Pandora at ~US$5), or listen to Beats 1 Radio.

Cumulus is shifting attention to its ~8.5x levered balance sheet and restructuring its debt including a recent prepayment of US$65m of its senior secured term loan facility. Staff turnover is also high with 50% employee churn in 18 months; any initiatives brought on board by newly appointed CEO Mary Berner will likely take time to be implemented. National spot performance underperformed local in ’15, primarily the result of poor ratings leaving Cumulus under pressure with only ~10% upfront accounts closed so far for ’16.

Similarly, iHeart has a sizeable ~US$21bn in debt and is distracted by pressures from creditors to restructure; a recent ~US$200m dividend and proceeds from a US$459m sale of outdoor billboard markets total the US$650m+ that iHeart has available for refinancing.

This competitive backdrop coupled with Pandora's recent initiatives could boost near- and long- term metrics. Pandora's share of US radio listening is 9.49% up from 9.06% YoY while metrics like higher direct sell-through rates have improved. Pandora is capturing 26% of local ads (vs 22% previously); this should accelerate as it invests in a local sales force (now numbering 155) and an improved technological infrastructure. Ad revenue is expected to be up ~26% YoY in ’16.

For an analyst ratings summary and ratings history on Pandora click here. For more ratings news on Pandora click here.

Shares of Pandora closed at $9.46 yesterday.

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