Media's Mixed Outlook for 2008

Media stocks face several headwinds in 2008. Advertising growth across most media is decelerating. Fragmentation of time spent using traditional media continues. Regulatory change is either not helpful or punitive. Merger and acquisition activity will be low because of problems getting financing. The writers' strike could bite hard on the revenue side of the TV business and confuse the outlook for the movie business in 2009.

Not all is lost, however. Political spending will set records and tighten up inventory-producing upward pressure on rates. Cost savings are driving margins and will get a boost from the writers' strike. Internet and digital revenues are becoming material for many companies and growing very quickly. Balance sheets are in good shape and free cash flow is high, giving management several options for enhancing shareholder value. Lack of M&A activity is viewed positively by investors, because most big media deals have not produced value.

Against this confused backdrop, it will be hard to make money across the sector in 2008. However, as Jim Cramer says, there is always a bull market somewhere, and positive change is happening at many companies.

My best ideas for absolute dollar profits in 2007 are Central European Media Enterprises (CETV - commentary - Cramer's Take), Discovery Communication (DISCA - commentary - Cramer's Take) and News Corp. (NWS - commentary - Cramer's Take). On a relative basis, I also like Disney (DIS - commentary - Cramer's Take), Meredith (MDP - commentary - Cramer's Take), Regal Entertainment (RGC - commentary - Cramer's Take) and National Cinemedia (NCMI - commentary - Cramer's Take).

Advertising Outlook

Advertising growth, the largest driver of media fundamentals, was poor in 2007, particularly in traditional media in U.S. markets. Universal McCann believes that total ad spending in the U.S. in 2007 will grow less than 1%. If you eliminate Internet advertising, which will grow north of 25% in 2007, total ad spending was slightly negative. The major trend in 2007 was weakness in local advertising offset by strength in national and Internet advertising.

For 2008, the outlook is not much better, with the exception of political advertising. Political advertising is spent mainly at local media outlets such as TV and radio. The volume should be enough to push TV growth into positive territory and prevent radio growth from decelerating further into negative territory. However, investors are unlikely to pay for politically driven ad growth.

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At time of publication, Birenberg was long Disney, Regal Entertainment, News Corp. and Central European Media Enterprises in client and personal accounts; and he was long Time Warner in a client account; but 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.