Media Companies Face the Coming Slowdown

I spent Wednesday in New York while sitting at my desk in Chicago. In a sign of the times, I skipped the UBS Media Conference in a cost-saving measure. I've gone many years in a row to this well-run event. Fortunately, modern technology means I can still "attend," although the upside in these soirees comes from one-on-one meetings with companies, chatting in the hallways with company reps and other buy-siders, and building the connections that can only be made face to face.

On Wednesday, I listened to presentations by Time Warner (TWX - commentary - Cramer's Take), Discovery Communications (DISCA - commentary - Cramer's Take), Gannett (GCI - commentary - Cramer's Take), Liberty Global (LBTYA - commentary - Cramer's Take) and Scripps (SNI - commentary - Cramer's Take). Before providing a brief recap of each presentation, I want to add some color to the advertising forecasts that came out of the meeting.

Advertising represents 20% to 70% of revenue for most major media companies. Even for those that are less exposed, the strength and tone of the advertising market materially affects stock prices by controlling sentiment toward the group.

At the conference, major advertising forecasters including Zenith Optimedia, Magna and CBS all dramatically lowered their 2009 forecasts. However, the forecasts were not any worse than the already bleak outlooks from Wall Street analysts. Consensus has formed around a 5% to 8% drop in U.S. advertising in 2009. This slightly overstates the weakness, as 2009 will not have the Olympics or a presidential election.

Local media are expected to continue to underperform, with newspapers, radio and local TV stations each dropping 10%-plus. National advertising will hold up better but still be down mid-single digits. The worst national category is going to be magazines, with broadcast TV finally succumbing. Broadcast TV, which had held up well until recently, is now encountering weak pricing and slack demand. It could be down 8% in 2009.

Cable TV networks and the Internet will be areas of relative strength. Cable TV should be flattish as it continues to benefit from ratings gains and relatively cheap pricing. The Internet faces problems in display ads, but search remains a growth area, and overall spending remains in positive territory.

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At time of publication, Birenberg was long CME, DISCA, TWX and DWA, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.