An anticipated surge in advertising expenditure next year is leading fund managers to be positive on...
An anticipated surge in advertising expenditure next year is leading fund managers to be positive on media, broadcasting and advertising related stocks.
This growth in advertising demand in the US during 2000 is expected by Britannic Asset Management as a result of the Presidential election, the Olympic Games in Sydney Australia, and the emergence of numerous dot.com companies.
Although advertising in the US usually grows at around 5-6% per year, growth is tipped at 8% during 2000, according to figures released by US advertising agency Interpublic. It expects this growth to benefit small, medium and large cap companies involved in the media, advertising and broadcasting sectors.
Both Douglas Wright of Britannic and Ann Hall of Henderson Investors, are positive on these types of companies, primarily due to the expected increase in advertising revenue.
Hall, small cap fund manager, says an added advantage in small cap media stocks is that many companies have come from relatively low valuations.
For example, Hall predicts Cox Radio, which at the start of 1999 was trading on a P/E ratio of 18 times historic earnings and is now on 36 times historic earnings, will continue to increase in value.
She says: "After a long period of underperformance, small caps are starting to turn relative to large caps. As the market has broadened, it has started to pay more attention to multiples of valuations, we've seen the Russell 2000 start to outperform the S&P since February this year.
Hall expects the current improved valuations in the overall small to mid cap segment of the market to be maintained throughout 2000.
She says: "We expect stocks will still have some modest advances based on the growth in cash flow. This year has been extremely good but next year we will expect more modest advances based on the growth in the cash flow of radio stations."
She says in addition to predictions of increased expenditure, small cap media companies, particularly radio stations are in the middle of a consolidation phase.
Hall adds: "There have been a lot of opportunities amongst the smaller radio companies, as bigger companies shed their assets in the process of becoming larger in other areas. This enables smaller and mid cap players to buy up assets which has proved very positive for their cash flow."
Radio companies, outdoor advertising and advertising agencies account for 15% of the Henderson American Smaller Companies unit trust, which is overweight against the Russell 2000. The Russell 2000 does not have a media sector per se but classifies these stocks within the consumer sector.
In the Britannic US fund, Wright holds OmniCom, the world's largest advertising and marketing company which in turn owns three of the world's biggest 10 advertising agencies and has recently moved toward a internet advertising strategy, by owning shares in five of the top 20 internet advertising agencies.
Wright says advertising agencies are benefiting from a trend within other sectors, whereby big advertisers are seeking to use fewer advertising agencies.
He says: "Although OmniCom is number one in the world, it only accounted for 6% of total advertising expenditure during 1998, so there is still significant room for consolidation and for this company to take a bigger slice of the market."
Wright also favours Time Warner, the world's largest media and entertainment company. He says management is committed to driving higher returns on invested capital through disciplined capital usage.
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