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August 27, 2006

Making Money In Media Despite Weak Ad Spending

According to data from TNS Media Intelligence, advertising spending in the U.S., excluding paid search, fell by 0.3% in May 2006. According to TNS, this is the first comparable monthly decline since the advertising recovery began in May 2002. Network TV and newspapers suffered the biggest declines during May. Areas showing growth included non-search Internet advertising and Spanish language TV networks.

Even with May's decline, ad spending as measured by TNS is up 3.9% for January through May but compared to 1Q06 GDP growth of 5.6%, that is a poor performance. In fact, one notable facet of the current economic expansion is that advertising growth has lagged GDP growth. Historically, advertising expenditures rise faster than GDP when the economy is expanding, which is why the media is classified as a cyclical growth industry. This year's slower-than-GDP advertising growth is especially troubling given the fact that May's downturn coincided with 2Q06 GDP growth of just 2.5%. Plenty of forecasters think that even slower growth lies ahead for economy, possibly even a recession....

With recent data supporting the idea that non-Internet advertising might be turning into just a cyclical industry, it is no wonder that ad-supported media stocks have seen their stock market valuations contract. And with plenty of signs that slower economic growth is baked in for at least a few quarters, bullish investors expecting media stock valuations to expand may have a long wait.

To invest successfuly in mediae stocks against a weak ad spending environment, you have to stick with trading ideas, special situations, or companies offering sustainable multiyear growth. Northlake's portfolio does just that and continues to include Central European Media Enterprises (CETV), Disney (DIS), NTL Incorporated (NTLI), and Regal Entertainment (RGC); CETV and DIS for growth, RGC for a trade, and NTLI as a special situation

Posted by Steve Birenberg at August 27, 2006 07:43 PM in All Positions