The reason for this recent strength is the pick-up in advertising activity. After a slump during the recession, advertising is now predicted to rebound strongly. Forecaster Zenith Optimedia recently estimated that television advertising for the second quarter would be up 20 per cent. A predicted rebound in television and outdoor advertising prompted Goldman’s analysts to raise their 2010 earnings forecasts across the European-listed media stocks by 3 per cent. They have already increased their 2010 earnings-per-share (EPS) forecasts by 35 per cent since May 2009
The report said that UK television advertising is recovering more strongly than anticipated, with the most positive surprises coming from ITV. Goldman’s picks of the European media sector include ITV, French advertising agency Havas and London-listed publisher Reed Elsevier, while it has just upgraded Havas’ British rival Aegis to buy from neutral.
At the end of last month, RBS analyst Paul Gooden also noted that the green shoots of advertising recovery have blossomed into a more meaningful one. He forecasts an average of 7 per cent advertising growth in 2010 for the broadcaster sub-sector and 0.5 per cent revenue growth for the agency sub-sector. Historical performance would also suggest good news for the media sector. Gooden’s research reveals that in the early 1990s cycle, the sector went on to perform well once GDP turned positive. This appears to be repeating itself: the wider European media sector, as measured by the DJ Stoxx Europe 600 Media index, has been steadily rising since its low of 149.82 at the start of February to 175.22 on Friday.
Spread betters with a short-term view should concentrate on certain broadcasting stocks at the moment because these tend to perform well early in the economic cycle. For example, both ITV and French broadcaster M6 are looking strong. In contrast, advertising agencies are much later-cycle stocks and therefore have greater longer-term upside potential. Gooden reckons that growth in these stocks should still be relatively subdued in 2010 with a more sustained recovery in 2011.
RBS has made four bull and four bear stock picks within the European media sector. Among the bulls are information provider Informa, WPP, French advertising group Publicis and ITV. It sees both WPP and Publicis as inexpensive plays on the global recovery. In terms of the bear ideas, Gooden picks Vivendi, Lagardere, TF1 and Pearson. French conglomerate Lagardere’s 2010 guidance was disappointing and TF1’s valuation continues to look stretched, he says.
A cyclical sector, media should continue to do well as the economic recovery gathers steam and companies look to increase their advertising budgets. Amplify a wider sector bet with bull stock picks or hedge it with a bearish stock.