Media stocks with revenues from advertising rather than subscription will have more attractive valua...
Media stocks with revenues from advertising rather than subscription will have more attractive valuations within three months, according to Aled Smith, director of global equities at M&G.
Up until the disaster on 11 September 2001, Smith had begun to invest more in advertising media stocks such as AOL and was moving away from the more defensive subscription-based companies. But since the crisis in the US, he says everything has changed and there is no visibility at the moment. In line with markets as a whole, most of the media sector has fallen in the past few weeks,
Michael Maughan, pan-European media analyst at Gartmore, says: 'Last week saw people selling even the most widely held media stocks. It was publishing companies rather than those exposed to advertising that were hit the most. This was not because the long-term fundamentals of publishing companies are any worse than those reliant on advertising, just that advertising has taken far too much of a hit already to be able to fall much further.'
Numbers have been very poor for this quarter, which affects broadcasting companies much more, says Smith.
'With broadcasters, if you see revenues decrease by 20% then profits will fall by 70%-80%,' he adds. 'This is because they are exposed to a high level of leveraged fixed costs. Next year, it is likely that we will see another negative year for advertising. We have never seen two successive years of negative advertising growth so it will be interesting to see how this affects companies such as broadcasters, whose profits are so dependent on revenue.' Maughan says that advertising companies are very hesitant to give out numbers at the moment.
'They would rather wait and give one profit warning later on than end up giving two profit warnings,' he explains. 'As they are not forthcoming with their figures we would rather stick to stocks such as subscription-funded publishers and pay TV.'
Smith adds: 'We would like to see advertising companies' numbers come down another step after the third quarter reports. More specifically, the markets are projecting 5% growth for the year and we hope this will be revised down to 2%. This will be an underestimation in our view, as we believe there will be 4% growth.
'This should provide some good opportunities and undervalued stocks and then we will begin to take some more risk with advertising-exposed companies.'
Another issue within the market is that there is likely to be an easing of regulation in the US, according to M&G. 'This is likely to be sped up in light of the economic climate to allow the sector as a whole to become stronger,' Smith says.
'There is talk of a loosening of rules regarding cross-ownership, so that for example one company would be allowed to own both a radio station and a television network. This would facilitate consolidation and create a number of investment opportunities.'
Maughan adds these regulatory issues will benefit large players such as BSkyB. 'We will switch into leveraged stocks when we have been able to factor in all of the risk,' he says.
Attractive advertising valuations.
Consolidation likely in the US.
Regulators to become more lenient.
Publishers hit hard last week.
Advertisers reluctant to report numbers.
There is a lack of visibility.
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