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December 05, 2005
Day One at UBS: The Big Picture
"It's a real mess." Mark Cranmer, who runs international for the big ad buying firm Starcom MediaVest, is describing where the advertising supported industries are in trying to determine how you value the consumer's audio-visual exposure and how he engages with it.
This is my key takeaway from the first day of the 33rd Annual UBS Media Conference. I spent most of the day listening to panel discussions rather than company presentations hoping to get a big picture view. Mark's comment captures not just the sluggish state of advertising but the confusion that exists in all media. According to Steve King CEO, of Zenith Optimedia, the confusion emanates from the fact that "technology is changing the way consumers interact with media and blurring the distinction between media types." Listening to George Bodenheimer talk about ESPN's investment in broadband and mobile or Rich Boehne of E.W. Scripps chat about the company's growing internet presence, one can’t help but come away thinking that things are really changing. For the time being, the change is disruptive as the visibility of growth in traditional media is reduced. In turn, multiples investors will pay for media stocks are compressing....
My sense is that estimated growth rates for 2006 are still too high across most media companies unless GDP growth is above expectations. King and Robert Coen, the dean of advertising forecasters at Universal McCann are both predicting U.S. ad growth in 2006 up between 5% and 6% against 2005 growth that will settle in the upper 4% range. Last year at this conference both predicted growth in 2005 would be north of 6%. If the 2006 forecasts are correct, it will be another year where advertising as a % of GDP remains stable. Prior to 2000, advertising generally grew as a % of GDP when the economy turned up. This cycle, even including non-search internet advertising, advertising as a % of GDP is stuck at about 2.20%, below the 2000 dot com fueled peak of 2.52%. Keeping in mind that 2006 is an Olympic and political year, I don’t think the forecasts for 2006 are bullish. Furthermore, with internet display and search advertising still stealing market share, traditional media growth is likely to spend another year closer 4%. I just don’t see that enough to drive strong earnings and operating cash flow growth given continued cost pressures related to labor, content creation, and investment in new technologies.
In company news, E.W. Scripps (SSP) lowered its fourth quarter guidance due to weakness at his home shopping network, Shop At Home. This business is one of the only black marks on an otherwise astute management team and my sense from Q&A and some hallway chatter is that 2006 could the year they decided to exit the business after new divisional leadership fully assesses the situation. SSP also provided 2006 guidance which I would categorize as mixed. Revenue growth across most divisions was good but costs are up and I think the result will be the consensus estimate dropping form the current $2.26 more toward $2.15 to $2.20. Shop At Home is a culprit in the 2006 outlook as losses will remain in the $20 million without profitably even in the seasonally strong 4Q.
Lions Gate Entertainment (LGF) dropped over 11% on Monday after the omapny slashed its EBTIDA and net income forecast. Free cash flow guidance was maintained but investors are rightfully concerned that this figure will come under pressure in 2006 and beyond without a pickup in EBITDA growth. LGF blamed a film flop for the Usher movie In The Mix and weak DVD pricing, particularly for library catalogue. I think LGF has downside support due to its acquisition potential but it is hard to see another near-term catalyst until the Diary of a Mad Black Woman sequel in February. LGF is at the conference tomorrow. For now, I plan to hold my remaining small position.
That's all for today's report, I'll try to get another update out tomorrow.
Posted by Steve Birenberg at December 5, 2005 08:41 PM
