|  | | Price | 6.550 | | | Change | -0.190 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 36.550 | | | Change | +0.030 | |
Research Wizard
Add to MSN Stock List
Message Board
Related Articles
How does Sweeps Week work?
Related Resources
Screen for Big Media stocks
Screen for Advertising stocks
Company Focus
Recent articles:
• 4 stocks that make sense of every sale, 2/11/2004
• 7 low-risk cash cows yielding 6%, 2/4/2004
• Rivals plot their Super Bowl strategy, 1/28/2004
More...
| | Company Focus
5 gold-medal winners for 2004's ad frenzy
Whatever the arena -- Olympian or political -- the right media or advertising stocks could make all those annoying commercials feel like money in the bank.
By Michael Brush
If the Chinese gave names to years for economic trends, this one might be "The Year of the Ad.
Every four years, two powerful forces converge to drive up domestic ad spending -- the U.S. presidential campaign and the Summer Olympics. This year, theyll be joined by a third force: the economic recovery.
Together, this trifecta will boost outlays on advertising in a big way, decisively bringing the ad world out of its worst slump since World War II. The roughest patch occurred in 2001 and 2002, when ad spending contracted, thanks to the dot-com bust and the economic slump. Last year, spending finally came back, increasing by about 5%.
All told, U.S. ad spending could jump 7.4% this year, predicts Robert Coen, the director of forecasting at Universal McCanns Insiders Report, a division of the global ad agency Interpublic Group (IPG, news, msgs). (To see a breakdown of U.S. spending estimates, click here.)
The biggest winners: Television and radio. Spending on their ad time should increase by 7% to 12% because of the election and Olympics spending frenzy.
Political years, especially presidential years and Olympic years, are always a good thing for advertising, says Larry Haverty, a media analyst with State Street Research.
How to play this as an investor? Obviously, media outlets and ad agencies will be the top winners. But since the political campaigns and the Olympic ad spending push wont be around next year, the trick is to find companies that ride these waves and have something else going for them -- such as low valuations or other long-term bullish trends.
Heres our short list of advertising winners:
In broadcasting, well take Viacom (VIA.B, news, msgs), which runs CBS and MTV, and Fox Entertainment Group (FOX, news, msgs). Theyre among the best-positioned media outlets to gain from the political spending trends, but they each are growing at a healthy rate for other reasons, too. Theres also a tiny TV chain called Gray Television (GTN.A, news, msgs).The company is well-positioned to capture a nice chunk of political advertising dollars because it has many top-rated news programs in important local markets. Its also cheap compared with other regional TV chains such as Sinclair Broadcast Group (SBGI, news, msgs).
| Winners from 2004s big ad spending jump | | Company | Industry | Prime assets | | Viacom (VIA.B, news, msgs) | Broadcasting | CBS, MTV networks | | Fox Entertainment Group (FOX, news, msgs) | Broadcasting | Fox and Fox cable | | Gray Television (GTN.A, news, msgs) | Broadcasting | 29 local TV stations | | Interpublic Group (IPG, news, msgs) | Advertising | Stable of well-known ad agencies,
including McCann-Erickson WorldGroup and The FCB Group | | Omnicom Group (OMC, news, msgs) | Advertising | Stable of well-known ad agencies,
including BBDO, Doyle Dane Bernbach and Needham Harper |
|
What about Walt Disney Co. (DIS, news, msgs), which controls the ABC television and radio networks and the ESPN sports colossus?
Disney was on our short list. But we took it off because the Comcast (CMCSA, news, msgs) takeover offer -- and a very healthy quarterly earnings report -- drove the stock up so much last week. True, theres room for more upside because institutional investors arent likely to go for takeover offers below $30, say Prudential Equity Group analysts. But a lot of the gains already are in the stock price.
And why not NBCs parent company, General Electric (GE, news, msgs)? After all, NBC will broadcast the Olympics from Greece this year. Yes, but the benefits from the Olympics get lost inside the behemoth of GE. (CNBC, a partner of MSN Money, is part of NBC.)
On the advertising agency side, the global ad agency Interpublic Group is an intriguing turnaround that still has plenty of room for upside, along with more than a risk or two. Theres a safer play as well in Omnicom Group (OMC, news, msgs), the worlds premier global advertising agency.
Heres a closer look at the three forces driving this years expected ad spending trends and some of the best ways to play them.
The Olympics
In a move back to the future, the 2004 Summer Olympics will take place in the Greek capital of Athens. Major consumer products companies such as Coca-Cola (KO, news, msgs), Eastman Kodak (EK, news, msgs) and McDonald's (MCD, news, msgs) are already scheduled to run huge -- and expensive -- ad campaigns during the games.
These are high-profile events, and they know a lot of eyes will be watching, so they are going to try to have some fresh, compelling ads out there, says Kurt Funderburg, an analyst at Oakmark Funds who follows Interpublic Group. That, along with a recovering economy, will drive consumer companies to hike their ad spending this year.
But you dont have to be NBC to benefit from the Olympics. That spending push tightens up the whole advertising market, helping not only the ad agencies, but television outlets beyond NBC, says Haverty.
Political ad spending
Many media investors worry that a Supreme Court ruling upholding new restraints on political ad spending will put a lid on ad outlays during presidential election campaigns. But Bear Stearns analyst Victor Miller doesnt think the new limits -- caps on soft dollars and ads paid for by corporations in the weeks before elections -- will prove that big a restriction.
Significant increases in hard dollar contributions may make up the difference. And plenty of contentious political issues -- such as Social Security and Medicare funding, energy policy and homeland defense -- should fuel heavy political spending as well, he says. Miller thinks total 2004 political ad spending will come in at around $1 billion, about 10% less than what was spent in 2002. But he admits his estimates are conservative. MediaPost Communications, a publishing company that specializes in covering the advertising industry, for example, predicts 2004 political ad spending will hit $1.3 billion.
Local TV stations are the biggest likely winners from the political campaign spending orgy. The big ad agencies like Interpublic Group and Omnicom will get little, if any, of this business. The reason: They dont do political ads. But theyll benefit anyway because all that political spending will drive up rates in the ad market, Haverty says.
The economy
If the economic recovery continues, ad spending to promote consumer goods should increase sharply. Consumer confidence is coming back, and, if job creation picks up steam, that will loosen up pocket books all over the place, says Oakmarks Funderburg. In a December report, Coen of Universal McKann sees the economy growing this year at a 5.8% annual rate on a nominal basis. Advertising spending should exceed that gain by a full percentage point.
The television plays
The trick to buying the right broadcasting in The Year of the Ad is to remember that old political adage about all politics being local. Political ad spending on TV has a decidedly local bent, too. Bear Stearns Miller calculates that virtually all presidential election ad dollars are now spent with local broadcast outlets, up from 75% in 1992. The proliferation of states turning to referenda adds to the local emphasis on campaign spending.
Next, you want to look for TV chains with strong news channels, because theyre the ones that get the political ad dollars. Finally, of course, you want to go with TV chains that have other things going on besides political ad spending.
Which companies have all of this? Clearly Viacom and Fox fit the bill. (Fox is more than 80% owned by News Corp. (NWS, news, msgs).) Both posted impressive quarterly results last week, with year-over-year revenue growth of 11% and 7%, thanks in part to strength in film entertainment and cable divisions. And they both have many local stations to collect ad dollars in during the presidential election campaign.
Next, tiny Gray Television, with a market cap of under $800 million, looks well positioned too -- with a number of leading TV news outlets in the South and mid-Atlantic regions. Based in Atlanta, Gray has the No. 1 news channel at 22 out of its 29 stations, says John Emerson, a media analyst at Columbia Wanger Asset Management, which has a position in the stock. What really helps them out in political years is that they are dominant in local news, he says. Another plus: Many of its stations are in state capitals and college towns.
Despite these advantages, the stock trades at about a 15% to 20% discount to its group, if you take out the high-multiple Spanish-language TV chains, Emerson says. This suggests ample room for upside. Bear Stearns has a price target on the stock of $17.50, a 20% gain over the current price.
The ad agencies
Under previous management, Interpublic Group went on a buying spree, piecing together a series of advertising agencies, marketing operations, public relations firms -- and even race tracks. In short, it got overextended, says Oakmarks Funderburg, and now it has to make sense of it all.
The company houses McCann-Erickson, one of the largest advertising agencies in the world with an impressive list of blue-chip clients. Other divisions such as Foote Cone & Belding were once strong. But now theyre going through turbulent times. IPG has done well in the last year, but you still have a new management team trying to clean up some of the mess left by the prior two managements, says Funderburg.
On the plus side, Interpublic gets the most revenue (64%) of all advertising companies from pure advertising and media-related business as opposed to less cyclical sources like marketing and public relations. So it has better exposure to an economic turnaround, which tends to drive up ad spending the most.
It also has the most room for improvement in operating margins, which are under 8%, compared with 13% to 15% for many of its peers. It may take a couple of years to get there, but doubling the operating margins is a huge opportunity for Interpublic and its investors, says UBS Investment Research analyst Brian Shipman who has a price target of $21 for the stock. (Its around $17 now.)
Potential investors should know there will be plenty of bumps in the road along the way. The Securities and Exchange Commission is investigating the company for possible accounting violations. More clients and internal talent may defect because of the turbulence. And integrating so many mergers will remain a daunting challenge.
Omnicom, by contrast, is the safer -- if pricier -- play. Based on metrics like new business wins, internal growth that doesnt come from acquisitions, the ability to control costs and creative marketing awards, Omnicom consistently comes up as the industrys premier player, Shipman says. Investors have noticed, driving the stock up to $83 from around $50 a year ago. Theres still room for upside, though. Shipman has a 12-month price target of $93 while Merrill Lynchs Lauren Rich Fine thinks it could hit $100 in a year.
(Omnicom missed 2003 fourth-quarter earnings estimates by a penny on Tuesday, reporting $1.17. But organic revenue growth, whats left net of exchange rates and acquisitions, came in higher than Wall Street estimates. After dropping $2.34 on the news, the stock closed at $81.92, down just $1.18.)
One kicker could lie just around the corner for both of these global ad agencies. While the economy is improving nicely in the United States, most of the rest of the world still lags. Europe, for example, had virtually no growth in ad spending in 2003, points out Bear Stearns analyst Alexia Quadrani, and spending on the continent may show only a small increase this year. After the relative bonanza of the election and Olympic spending taper off, however, Interpublic and Omnicom could get a second wind in 2005 if a European economic recovery kicks in.
| Estimated U.S. national and local ad spending in 2004 | | Media | 2004 est. spending | Change from 2003 | | | Four TV networks | $17.3 billion | 12.0% | | | Spot TV | 11.6 billion | 9.0% | | | Cable TV | 15.8 billion | 12.0% | | | Syndication TV | 3.8 billion | 9.0% | | | Radio | 4.7 billion | 7.0% | | | Magazines | 12.4 billion | 7.0% | | | Newspapers | 7.8 billion | 7.5% | | | Consumer media sub-total | 73.4 billion | 9.3% | | | | | | | Direct Mail | 51.5 billion | 5.0% | | | Yellow Pages | 2.2 billion | 3.5% | | | Internet | 6.2 billion | 10.0% | | | Other National Media | 33.1 billion | 7.0% | | | | | | | Total national advertising | $166.4 billion | 7.4% | | | | | | | | Local advertising | | | | | Local Newspapers | $40.4 billion | 6.0% | | | Local TV | 14.5 billion | 7.0% | | | Local Radio | 16.0 billion | 6.0% | | | Local Yellow Pages | 12.2 billion | 3.5% | | | Other Local Media | 16.7 billion | 7.2% | | | Total local advertising | 99.9 billion | 6.0% | | | | | | | Grand Total | $266.4 billion | 6.9% | |
|
Source: Universal McCann
|
