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September 25, 2004

Media Stocks

I am a long-time investor and analyst in media stocks of all shapes and sizes. I like media stocks becuase the business is fairly simple, free cash flow capabilities are excellent, and US companies have an unrivavled global competitive position. Presently, Northlake's model portfolio contains two media stocks, Central European Media Enterprises and NTL, Inc. Those stocks have performed well in the last 18 months but most media stocks have not.

One of my key Wall Street contacts in the media sector is Lauren Fine, newspaper and ad agency analyst at Merrill Lynch. Lauren had a peice out last week from which I excerpted the following:

• Advertising Week in NYC has fueled a variety of discussions regarding the health of advertising, the growth of Internet advertising (up 43% in Q2), and the imminent changes in the network TV model due to increased penetration of broadband and PVRs.

• We maintain the view that advertising is still a vibrant field and believe that creativity is improving rather than worsening. A proliferation of media outlets combined with muted demand (stemming we believe from a combination of modest economic growth and questions regarding return on investment) are limiting the gains of traditional media relative to past cycles.

• On the margin, underlying demand for advertising is not improving, notwithstanding comments made by Unilever and Colgate that increased marketing is constraining their earnings performance or GM's accelerated advertising efforts to further its incentive program.

I agree with Lauren's assessment and this is the reason that Northlake is not presently using traditional large cap media stocks like Time Warner, Viacom, Clear Channel, Tribune, or Comcast. I am starting to look a little more carefully at these stocks, however. Traditional media stocks are trading at their lowest multiples of cash flows in years suggesting that Lauren's and my viewpoint is becoming widely held. The key to making money on Wall Street is to recognize when conventional wisdom is fully reflected in stock prices and taking the opposite side of the trade. We may be nearing that point on broadcast television, radio, and cable stocks so our antennae are up our research efforts increased.

Posted by Steve Birenberg at September 25, 2004 03:31 PM