Media stocks continue to act poorly. When I sold Northlake’s positions in Disney and News Corporation on the last trading day in May I was beginning to see more evidence that the deep recession in local advertising media like newspapers and radio was beginning to spread to national advertising such as TV. I had also started to notice the term “media recession” in a lot more news articles and research reports. Admittedly, this is one of those squishy sentiment indicators but I figured if the concept of a media recession that was still debatable was on its way to becoming conventional wisdom it would not be good news for any stocks in the group.
On Monday, in the daily Media and Communications Report from SNL Kagan (a must for any serious media investor), lo and behold, there was a story titled “Media Recession To Hit Some Industries Harder Than Others.” The article recapped a recent piece authored by IDC which stated that advertising expenditures across all media companies will fall by 7% in 2008 even including a material boost from the Olympics and the Presidential election. A 7% decline would represent acceleration from the first quarter which witnessed a low single digit decline across all media driven primarily by an upper single digit drop in newspapers and a mid single digit fall in radio. Network TV remained barely in positive territory but there are more and more indications that the scatter market softened sharply and suddenly during the later half of 2Q.
Given a weakening fundamental and sentiment backdrop, I still see little reason to maintain meaningful exposure to standard media stocks. Northlake continues to own just two pure media stocks, Central European Media Enterprises and Dreamworks Animation….

….CETV continues to experience very strong growth in Central and Eastern European countries that thus far are not witnessing a slowdown in economic growth. CETV also has upcoming positive news from the closing of its acquisition of the controlling interest in its operations in Ukraine and what I expect will be another very good quarterly earnings report. DWA is a play on the fact that analysts are underestimating the near-term and long-term earnings benefit of the better than expected North American and International box office performance of Kung Fu Panda.
I’d also like to reference my Real Money buddy, Doug Kass’, comments yesterday that he was thinking of using Morgan Stanley’s belated downgrade of its view of the theatre companies to cover his very successful shorts. I think Doug is making the right call due to: (1) yield support offered by Regal Entertainment, (2) the fact that starting in September box office comparisons should be very favorable, particularly in the important holiday season, (3) the additional declines the stocks took on the downgrade, and (4) estimate reductions by other analysts. In my Monday post I mentioned that the stocks needed estimate cuts before they could put in a bottom and look ahead to 4Q strength.
In the bigger picture, negative headlines about the summer box office present another headwind for the media companies which own the major Hollywood studios. That is not to say that individual studios might not perform well (Viacom’s Paramount is off to a great start and Fox has a couple of profitable films already under its belt) but a couple of months of down 5-10% weekly box office comps will reignite the “box is dying myth” and add yet another dose of negative sentiment to the media landscape.