Value and Vision: Identifying Media Growth Stocks in a Depressed Economy

"CBS reported significantly below consensus 1Q2009 results, and issued a 2009 EBITDA outlook with a credible low end, but a mid and high end that embed material back half ad trend improvements which we believe may be challenging to achieve. We believe the mid-high point of the company outlook requires the CBS TV network's (-9%) ad decline trend to improve significantly. While CBS should be a share taker and grow modestly in 2010, we don't have conviction in back half YoY growth." So reports Mark D. Wienkes of Goldman Sachs. Also reporting on CBS, James Dix of Wedbush Morgan Securities comments "1Q missed big time and 2Q seems little better, in our view, but non-advertising growth in 2H should cushion the blow - no change to 12-month target of $7.00.Even excluding favorable variances in 1Q08, EBITDA was down ~50% YoY in 1Q to $249.8m, below the Street range. Our take from management's seeing early signs of an improving local and national marketplace is that 2Q revenue will be down similarly to 1Q, which is generally in line with our pre-quarter checks…. we see no reason to step up to buy after the recent run-up, and expect the shares to trade off on 1Q results and new full-year 2009 EBITDA guidance whose midpoint is below our estimates and the Street. "Credit Suisse's Spencer Wang adds in his report on News Corp, "While NWSA shares remain inexpensive 5x EV/EBITDA, we maintain our Neutral rating given relatively high print and broadcast TV exposure and our concerns about the pace of financial improvement at Fox Interactive Media (FIM)."

Among the leading broadcast companies, CBS is the most exposed to both structural and economic issues impacting the media and advertising sector, and investor insights on CBS are, therefore, considered the most relevant to study to gain a meaningful perspective on the state of the industry from investors' point-of-view. But are they? Across the board, investor attitudes toward the major network companies are consistent with Wienkes' lack of conviction that back-half year-over-year growth will materialize and Wang's view on News Corp. that "neutral" ratings should be maintained. There was a time when CBS' Les Moonves' pre-Upfront exuberance and Rupert Murdoch's insights were considered relevant and trustworthy. But no more. POV on CBS is still considered relevant to analyses of ad-dependent TV companies. But it remains relevant for short-term valuations only. Where can investors look to gain more relevant and reliable insights on the long-term future of the television industry and better context for both short and long-term corporate valuations? Which media stocks offer investors the greatest long-term growth opportunities? Continue reading for the answer.

Where can investors look to gain better insight for long-term media company valuations? The answer is Disney (DIS). The CEO of a major broadcast or cable network company who retains the most credibility on Wall Street these days is Disney's Bob Iger, primarily because he consistently and accurately forecasts his company's economic realities, has a clear perspective on the industry's secular and economic realities, and most importantly shares a reasonable vision of the short and long-term future of his company and the media business. And Disney delivers on that vision. While Disney's share price is certainly impacted by economic and secular issues, Disney's decisions seem to be guided by a consistent vision of the future and Disney's role within that future. (Time Warner's Jeffrey Bewkes also meets those same criteria, but his stature on Wall Street hasn't yet achieved Iger's level of sustained credibility.)

Vision – either short or long-term -- is in very short supply in the media and advertising business today. Maintaining and promoting a positive outlook for ad spend in the second half of 2009 is not only unrealistic but misleading and inconsistent with the facts. Media agency Carat, in its March 2009 Marketplace Update Report, explains "It is widely believed that the U.S. advertising marketplace has never experienced such a dramatic pullback in spending across all media. Additionally, it will probably take many months before there are any viable signs of recovery. Regardless of when the recovery does happen, the advertising market will never be the same. Clients have placed tremendous pressure on agencies to realize cost savings and future spending will be more highly scrutinized. Most categories will see their spending decline in 2009. However, there is always the potential for them to pump more money into the marketplace if there is a rebound in the economy. The depressed economy may also provide an opportunity for clients to not only to negotiate more efficient pricing, but also to secure more flexible terms and conditions."

Carat's focus on negotiation for more efficient pricing and more flexible terms reflects the typical perspective of the media buying community. A downward cycle creates opportunities to push down prices. In his new featured blog at www.MediaBizBloggers.com, ABC-TV sales chief Mike Shaw (http://www.jackmyers.com/commentary/mike-shaw) argues for an increased emphasis on waste reduction and value enhancement in this year's Upfront negotiations. "The challenge to reduce waste in the message delivery process is the single most important factor facing agencies and their clients this year. Of course it's not like a buying strategy that minimized waste shouldn't have been the key decision driver in the past. But, when times were good it was possible to take a more liberal approach and get away with it because the universe of prospects was larger. And the people making the decisions were not held to the same standard of accountability. Cheap was good. Waste went with the territory. And I'm talking about all media, not just television. The focus this year will be to put your message above the value line." (http://www.jackmyers.com/commentary/mike-shaw/43905792.html)

In arguing for a focus on "value," Shaw explains what should be obvious -- there is a difference between the impression delivered to consumers whose economic realities require they purchase generic products, drive used cars and acquire few – if any -- discretionary products and services, and those consumers who retain discretionary income and are more open to brand marketing communications. Shaw correctly perceives that, in the past, mass media ad buying has been primarily focused on mass reach and frequency with little meaningful distinction among media options on qualitative (value-based) terms. Phil Guarascio, when he ran marketing for General Motors in the 1990s, regularly pointed out it was more cost efficient to reach 1,000 people through mass media and assume GM's 100 potential car buyers would be among them than it would be to find and target those 100 potential buyers and reach them in a more focused manner. Today those 100 potential GM car buyers have been reduced to 30, maybe even 20 or 10. At the same time, qualitative data is far more accessible and Nielsen ratings less relevant. The same mass media strategies no longer should apply to media selling and buying – and they certainly should not be considered relevant indicators for investment decisions.

Yet Guarascio's mass media model remains intact today, albeit with increased content-based targeting. Mike Shaw's arguments for increased emphasis on qualitative models within the mass media construct are critically important to the future vitality of the media and advertising industry. Most networks and agencies are approaching this year's Upfront market with little differentiation in tactics from past years. There are tweaks, bells, whistles and "Live + 3" considerations. But negotiations will continue to go forward based on Nielsen currency and age/gender audience delivery as the primary criteria. In this economy -- with DVR penetration in more than 30% of U.S. households, with the consumer economy depressed, with media fragmenting in micro-slivers, with agencies under tremendous pressure to reduce media pricing, and with a wealth of relevant data available for improved decision-making – Shaw's recommendations make tremendous sense.

Yet, the reality is that most media sellers and buyers will fall into traditional patterns and rely on outdated mass media, ratings and impressions-based formulaic strategies. Investors need to be cautioned to look beyond the ratings and look beyond Upfront spending results to gain real perspective on which media stocks have the greatest long-term viability. There is very little appetite among investors for media and advertising stocks until the general economy rebounds, so the most relevant issue is which media stocks are the best long-term plays. Investors need to determine which media companies are proposing, investing in and espousing visionary perspectives on the marketplace. Which offer an analytical point-of-view that extends beyond ratings and cost-per-thousand among women or men 18 to 49, or even 25 to 54? Which are focusing on value and vision, terms that are desperately needed if the media category is to regain Wall Street respect.

Jack Myersadvises media companies, agencies and marketers on long-term revenue growth opportunities and business models. ABC-TV is a client of Myers Media Services LLC. Jack can be reached at jm@jackmyers.com