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December 15, 2008

UBS Media Conference Part One

I spent Wednesday in NY while sitting at my desk in Chicago. In a sing 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-one meeting with companies, chatting in the hallways with companies and other money managers, and building the connections that can only be done face-to-face.

I listened to presentations by Time Warner, Discovery Communications, Gannett, Liberty Global, and Scripps Interactive. 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 less exposed, the strength and tone of advertising market materially impacts 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 form Wall Street analysts. Consensus has formed around a 5-8% drop in US advertising in 2009. This slightly overstates the weakness as 2009 will not have the Olympics of a Presidential election.

Local media is expected to continue to underperform with newspapers, radio, and local TV stations each dropping 10% plus. National advertising will hold a up better but still be down mid-single digits. The worst national category is going to magazines with broadcast TV finally succumbing. Broadcast TV which had held up well until recently now is 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 form ratings gains and relatively cheap pricing. Internet faces problems in display ads but search remains a growth area and overall spending remains in positive territory.

US ads spending is going to be worse than Western Europe and Asia but emerging markets should see growth. As a result global growth will likely be down 4-5%.

This background colors the commentary from management at the conference as well as my opinion of what stocks are best to own. My media portfolio presently consists of Central European Media Enterprises, Discovery Communications, Dreamworks Animation, and Time Warner....

....Key takeaways from TWX focused on advertising trends, AOL, and coming split with Time Warner Cable. On advertising, CEO Jeff Bewkes admitted business is slowing and visibility is poor but says TWX's cable networks continue to outperform the industry. On AOL, Bewkes discussed at length AOL's positioning and indicated they have reached the conclusion that it is better off paired with alarger entity or maybe even operating independently. On the cable split he idnciated it is on schedule for 1Q09 and that the cash ($9.3 billion) and improved balance sheet (Debt 1.6 times EBITDA) would be prioritized to shareholders in a "steady" manner. I hear that as a meaningful annual dividend which would be a positive. Overall, not much new but I think Bewkes is gaining investor confidence in improved performance for TWX on an operating and strategic level.

CEO David Zaslav offered very little new info in his overview of Discovery Communications. He did outline the unique growth profile for DISCA driven by international subscriber growth, international advertising growth, US digital subscriber growth, and redevelopment of US channels. The advertising recession is going to pressure DISCA, especially in the US but relative operating performance vs. peers should remain quite positive. Improved ratings recently at Discovery and TLC should help near-term results. Animal Planet needs better monetization and this is a focus of management. The investment case for DISCA is non-fiction programming plus international plus dual revenue stream plus HD.

Gannett spent a lot of time reviewing digital initiatives which now represent about 15% of revenues. Career Builder is by far the biggest piece of online revenues. There is no change to the bleak outlook for the printed newspaper. GCI warned that the toughest comps in 2009 will be in 1Q. Furthermore, visibility remains extremely low which I interpret to mean that current trends continue to get worse. Newsprint pricing is set to drop which combined with sharp volume reduction is a positive for 2009. The company is actively managing its balance sheet and faces a $750 million maturity in 2009. Balance sheet stress is not yet severe but with revenue and EBITDA dropping at double digit rates the risk grows every day. The destruction of GCI for reasons beyond management's control is sad. It was a great and important American company. Management does the best it can against hurricane force winds. The stock may bounce significantly when economic conditions ease but it is not something I am willing to try to time.

Posted by Steve Birenberg at December 15, 2008 08:56 AM in Media