Media's Outlook for 2008 By TheStreet.com

Internet advertising is, well, media. And, people who make a living in advertising, should have their finger on the pulse of where things are going within media. Here's a good article to help capitalize on where things are going. Enjoy.

j. Bruce
www.SalesDrivenMarketing.com
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Media's Mixed Outlook for 2008
By Steve Birenberg RealMoney Contributor12/21/2007 10:00 AM ESTURL: http://www.thestreet.com/p/rmoney/media/10395562.html

Media stocks face several headwinds in 2008. Advertising growth across most media is decelerating. Fragmentation of time spent using traditional media continues.

Regulatory change is either not helpful or punitive. Merger and acquisition activity will be low because of problems getting financing. The writers' strike could bite hard on the revenue side of the TV business and confuse the outlook for the movie business in 2009.

Not all is lost, however. Political spending will set records and tighten up inventory-producing upward pressure on rates. Cost savings are driving margins and will get a boost from the writers' strike. Internet and digital revenues are becoming material for many companies and growing very quickly. Balance sheets are in good shape and free cash flow is high, giving management several options for enhancing shareholder value. Lack of M&A activity is viewed positively by investors, because most big media deals have not produced value.

Against this confused backdrop, it will be hard to make money across the sector in 2008. However, as Jim Cramer says, there is always a bull market somewhere, and positive change is happening at many companies.

My best ideas for absolute dollar profits in 2007 are Central European Media Enterprises (CETV) , Discovery Communication (DISCA) and News Corp. (NWS) . On a relative basis, I also like Disney (DIS) , Meredith (MDP) , Regal Entertainment (RGC) and National Cinemedia (NCMI) .

Advertising Outlook

Advertising growth, the largest driver of media fundamentals, was poor in 2007, particularly in traditional media in U.S. markets. Universal McCann believes that total ad spending in the U.S. in 2007 will grow less than 1%. If you eliminate Internet advertising, which will grow north of 25% in 2007, total ad spending was slightly negative. The major trend in 2007 was weakness in local advertising offset by strength in national and Internet advertising.

For 2008, the outlook is not much better, with the exception of political advertising. Political advertising is spent mainly at local media outlets such as TV and radio. The volume should be enough to push TV growth into positive territory and prevent radio growth from decelerating further into negative territory. However, investors are unlikely to pay for politically driven ad growth.

Within the U.S., the best-performing categories -- you could even call them growth categories -- will remain Internet, cinema, outdoor and cable TV networks. Internet should continue to grow near 20%, and cinema advertising should continue to gain share and grow 15%.

Outdoor and cable TV networks may be the only traditional media to offer growth in 2007 when political is backed out. Outdoor growth is decelerating rapidly but should hold at least in the upper single digits. Cable networks have already decelerated from 15% to upper single digits but should stabilize in the 5%-7% range.

The only other growth in advertising in 2007 and 2008 is international, which is being driven by emerging markets. In 2008, international growth should again run in the range of 4% to 5% -- still a premium to politically driven U.S. growth of 3%-4%.

To get an idea of the growing influence of emerging markets, Zenith Optimedia is forecasting that Central and Eastern Europe will see its share of global advertising rise from 5.5% in 2006 to 8% in 2010. In 2010, the region will have greater advertising revenue than Japan. Similarly, Asia ex-Japan will see its share of global advertising grow from 11.7% in 2006 to 14.2% in 2010. In 2010, advertising in Asia ex-Japan will be two-thirds the size of that in Western Europe.

TV Guide Cable stocks have been smashed in 2007 by fears about competition from satellite TV providers and telco TV. I don't expect sentiment toward cable to change for at least six months, but I do believe the reality is far better than current stock prices imply. Therefore, I believe patient investors will be rewarded for buying cable stocks at current prices. Comcast (CMCSA) is my top pick.

I expect current optimism toward satellite stocks to wane as 2008 progresses. The bottom line is that macro trends in multichannel TV affect all three subsectors more equally than stock prices reflect. Thus, investors should buy the most out-of-favor group when valuation and sentiment reaches extremes. For now, that is cable.

The TV business will benefit from political advertising but faces secular challenges, which will be exacerbated if the writers' strike continues through spring. Local TV revenue will return to positive territory, including political, but multiples in the group are too high, given underlying negative growth.

Broadcast network TV is especially challenged by the strike, and investors will be more worried about the secular challenge than about the cost savings. The best growth is outside the U.S. Therefore, Central European Media Enterprises is my best idea for investing in the TV business. Cable network growth is stabilizing, it benefits from the writers' strike, and it is more easily transferred to the Web. Discovery Communications is best positioned here.

Enjoying Entertainment

Entertainment companies have exposure across most media sectors. Disney, Time Warner (TWX) , and News Corp. are the three primary plays. All three stocks offer relative performance upside in 2008 for different reasons:

Disney is very tightly managed and has great momentum from a multiyear hot streak in content production.

Time Warner is cheap and could see a dramatic restructuring under new management.

News Corp. offers the best growth, and estimates and guidance are too low unless the U.S. has a legitimate recession. News Corp. is my top choice.

Printing New Lows

Newspapers are looking at another tough year. Classified advertising is moving to the Web, and there is nothing newspapers can do about it. Even if they develop good Web businesses, they will lose massive market share at lower CPMs.

I expect another year of negative growth. The stocks have gotten hammered and could get a dead-cat bounce at any time, but the secular trend is clear. If you want to bottom-fish, Gannett (GCI) is by far the best idea. It is cheap and financially strong.

Too Much Static in Radio

Radio growth just went negative, and investors are only beginning to appreciate the secular challenges it faces. Local advertising is losing share to national, and radio is losing share to other music delivery mechanisms.

Multiples in the group have come in but remain at a significant premium to other media stocks. I believe radio in 2008 and 2009 will follow the path of newspaper stocks in 2007. Avoid the industry.

Glossy Returns for Magazines

Magazines have shown surprising strength -- advertisers like the narrow genres, and the industry has done a good job launching new titles and reinvigorating older titles. In addition, magazines have done a better-than-average job of moving their brands online. Meredith is an excellent relative performance idea for 2008, particularly if it turns out to be a tough year for the stock market.

The Not-So-Great OutdoorOutdoor has been a favored sector, but growth is decelerating fast. The stocks still trade at a significant premium multiple compared with other subsectors.
I believe that decelerating growth will make it difficult to make money on an absolute or relative basis in outdoor in 2008. Therefore, I have no long recommendations.

Movie Ads Moving Forward

Cinema advertising came into its own in 2007 with the IPO of National Cinemedia. Cinema advertising has a tiny market share in the U.S. compared with Western Europe. I believe market share will rise steadily for the next several years, fueling consistent mid-teens growth. NCMI is not a cheap stock, but I believe media investors will reward growth given the lack of growth across most of the sector.

One headwind NCMI will face in 2008 is tough box-office comparisons. This could also hamper the performance of theater stocks. Nevertheless, with great dividend support and underappreciated growth drivers from the transition to digital and 3-D, the recent collapse in theater stocks due to a weak fourth-quarter box office has set up a good entry point. Regal Entertainment will do particularly well if the stock market does poorly, because of its stable dividend that produces a current yield of greater than 6%.
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At time of publication, Birenberg was long Disney, Regal Entertainment, News Corp. and Central European Media Enterprises in client and personal accounts; and he was long Time Warner in a client account; but holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.