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Media companies scrutinized as ad spending slows

Fri Sep 14, 2007 8:54am EDT

(Repeating Sept 13 story)

By Kenneth Li

NEW YORK, Sept 13 (Reuters) - Fears that a possible U.S. recession will sap advertising spending have soured investors on the media industry, but some entertainment companies just might be more resilient than Wall Street thinks.

For starters, more cost-conscious consumers could end up at the cinema even if they spend less elsewhere in the event of a recession. After all, this summer's films are estimated to have raked in a record $4.18 billion, and that bodes well for DVD sales for the upcoming holiday shopping season.

The weak dollar could also help, particularly for Hollywood studios that earn a lot of foreign box office revenue.

"Investors have forgotten that this industry is a big beneficiary of the weak dollar," said Gamco Investors associate portfolio manager Larry Haverty. A movie ticket in London costs the equivalent of $22, compared with $11 in New York, for example.

Media watcher said companies with significant international exposure, such as News Corp NWSa.N and Walt Disney Co (DIS.N), are good stock picks.

"For Disney, obviously, visibility on theme parks is key in terms of traffic," said Standard & Poor's media analyst Tuna Amobi, adding that visitors to Disney theme parks have been holding up, though the September quarter will be critical.

Analysts cite CBS Corp (CBS.N), which is dependent on the U.S. television advertising market, and newspaper publishers like The New York Times Co (NYT.N) and McClatchy Co (MNI.N) as among those that would be most hurt by a steep U.S. economic slump as marketers trim ad budgets.

"As the economy weakens, ad spending will weaken. The Internet is taking a bigger share from broadcasters and newspapers," said Ed Maraccini, a portfolio manager at Johnson Asset Management.

TNS Media Intelligence forecast only 1.7 percent growth in U.S. advertising spending in 2007, compared to 4.1 percent growth in 2006.

"The first half is not a happy picture," TNS director of research, Jon Swallen, said, pointing to a 0.3 percent fall in U.S. ad spending in that period. It was the first time ad spending has shrunk for two straight quarters since 2001.

"A lot of the fundamental circumstances that have contributed to the first half are still in place. It'll make for a challenging second half of the year," Swallen said.

Amid the pessimism, the S&P Media Index .GSPME has fallen about 8 percent over the past two months, underperforming a 4 percent decline in the S&P 500 .SPX.

Within media, Disney has lost 2 percent, while News Corp fell 5 percent and CBS fell nearly 11 percent. McClatchy and New York Times dropped 23 percent and 17 percent respectively.

MEDIA SUMMITS

It is in this climate that executives from many major media companies will speaking to investors at conferences next week hosted by Merrill Lynch and Goldman Sachs.

Indeed, Goldman recently downgraded the entertainment sector to "cautious" from "neutral," citing the U.S. economy as one reason why its 2008 estimates could be too ambitious.

Goldman media analyst Anthony Noto said in a Sept. 4 report that the U.S. credit crunch has curtailed moves by some media companies to boost their stock prices, such as through bigger share buybacks or selling off assets at rich valuations.

One company that could be impacted by the credit crunch, analysts said, is Time Warner Inc (TWX.N), whose chief executive, Richard Parsons, and AOL Internet unit head, Randy Falco, will both be making presentations next week.

Investors are looking for any signs that Time Warner may want to sell or spin off AOL or the Time Inc. publishing unit, moves which could be difficult in the current economic climate. Time Warner shares fell 9 percent over the last three months.

"Ultimately, I believe that issue will be addressed, whether it is in the next two months or next five years," said Morris Mark of Mark Asset Management, which owns a $7 million stake in Time Warner.

For its part, Time Warner has made no indications it planned to sell or spin off AOL. Rather, AOL has aimed to bolster its online advertising technology, having bought wireless ad firm Third Screen Media as well as Tacoda, a company that targets users habits.

Gamco's Haverty said of AOL, which cut its 2007 ad growth forecast at the end of the second quarter: "Management needs to either fix it or sell it. People who've been patient are clearly becoming less so."

Gamco owned a $215.7 million stake in Time Warner as of June 30, 2007.

((Editing by Paul Thomasch; Reuters Messaging: kenneth.li.reuters.com@reuters.net; +646-223-6224; e-mail: kenneth.li@reuters.com))

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