Exclusive: It's the year of the media

Cost-cutting, sales jumps and world recovery in advertising pleases the publishers, says Jenne Mannion
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The Independent Online

The Telegraph group is up for auction, Comcast is making a hostile bid for Disney, and ITV is trying to make its new structure and identity work.

These issues, combined with stunning performance over the past year, have thrown the media sector into the spotlight. But investment professionals remain divided over its prospects.

Media stocks have performed well in the UK, but less so globally, due to this sector's domination by US companies and the weak dollar. Over the year to 24 February, the FTSE All Share media and entertainment index has delivered total returns of 48.76 per cent, and the FTSE All Share's returns are 26.38 per cent.

But globally, the MSCI World Media index delivered returns of 20.27 per cent in sterling terms over the 12 months to 24 February, marginally underperforming the MSCI World index return of 22.39 per cent.

Strong performance over the past 12 months follows a tough two years in media stocks. Media was the M in TMT, or telecoms, media and technology, so the sector went through the mill when the bubble burst in early 2000. John Hatherly, head of global analysis at M&G, says: "The sector was carried to great heights in 1999 and early 2000, as it was perceived to be a major beneficiary of the internet technology boom. And high share prices encouraged expensive acquisitions; Vivendi, the French company, is the obvious example, having bought several big companies including Universal Studios. But media stocks suffered when the TMT bubble burst in 2000."

He says now that companies are trading at more modest valuations, and the economy appears to be improving, several media companies look attractive. "If you take the view that most media companies should increase their sales by more than GDP, there are some good opportunities," Mr Hatherly says. "There is a lot of cost-cutting, and the theme of mergers and acquisitions should continue."

The UK media sector, which represents less than 5 per cent of the FTSE All Share index, is diverse and companies are influenced by different factors. Most will benefit amid an economic recovery as advertising expenditure increases. The better-performing media stocks over the past year are those most sensitive to an economic recovery. In that time, Reuters and ITV have been among the five best performers in the index of FTSE 100 stocks. Although Reuters does not focus on advertising, it is still sensitive to economic recovery and its share price is correlated with the performance of investment banks.

Joe O'Donnell, a private client manager at BWD Rensburg, says: "Reuters is considered a play on City employ- ment, the idea being that the more folk hired, the more Reuters terminals are used. But this is all speculation, because sales continue to fall."

ITV has performed well because of its high exposure to advertising. The merger of Granada and Carlton has also boosted performance. But others are not so reliant on advertising and are less cyclical. Reed Elsevier, for example, deals in professional journals and education, which are not dependent on advertising and have less scope to benefit from any pick-up. Reed has not performed as well as its cyclical counterparts.

Tom Carroll, manager of the Schroder UK Enterprise fund, says operational gearing in many companies is attractive, adding to the benefits of economic recovery. Many media stocks are now highly efficient and costs have been cut. He cites the example of United Business Media, which ratchets up a 5 to 6 per cent rise in profits for every 1 per cent increase in sales. "ITV and Reuters are in much the same situation; you don't need a lot of growth to offer a significant boost to its profits," he says.

One way to spread the risk of investing in the sector, and a good way to gain global exposure to media stocks, is through a managed fund, but little dedicated choice is available. Darius McDermott, a financial adviser at Chelsea Financial Services, says the only unit trust available to UK investors that focuses purely on media is the M&G Global Media and Communications fund.

The fund manager, George Tsinonis, holds a portfolio of about 58 stocks from around the world. The best holdings in his portfolio include Verizon Communications, Time Warner, Viacom, Walt Disney Co and NTT Docomo. Because the fund also encompasses communications, it also contains telecom stocks such as Vodafone, Telefonica and Deutsche Telecom.

Another reason behind the recent good performance in the sector is the trend toward consolidation. In the United States, Comcast is making that hostile bid for Disney and in the UK Carlton and Granada have, of course, merged. Mr Carroll says: "Logically, as media companies become more confident we are through the worst of the downturn, many companies such as United Business Media, which do have a lot of cash, are in a good pos- ition to take advantage of opportunities."

Mr O'Donnell is sceptical of stocks that appear to be pricing in a strong advertising recovery. He says the economic backdrop is undoubtedly more favourable than 12 months ago, but there seems little evidence of strong recovery in advertising.

Zenith Optimedia forecasts show that advertising expenditure in the UK is expected to grow by only 1 per cent this year, and is expected to remain flat in 2005 and 2006 at constant prices. The picture is rosier in the US, with growth of 3.9 per cent forecast for 2004 and about 2.5 per cent in the two following years.

Mr O'Donnell says: "This is growth but I would not describe it as a strong recovery. It is also worth noting that if advertising expenditure cannot grow strongly with US interest rates as low as 1 per cent, it is unlikely to grow strongly at all."

After the sharp recovery in the sector, are media stocks now too expensive? Mr Hatherly says: "Obviously, stocks are not particularly cheap. This is a premium-rated sector, because the growth rate should be above average. The issue is how high should that premium go? This is a diverse sector and there are opportunities still to be found."


Tom Carroll, manager of the Schroder Enterprise fund, is optimistic about the prospects of United Business Media, which is highly geared into an economic recovery.

Scottish Media Group, which owns Scottish TV licences and radio stations, is another of Mr Carroll's main media stocks.

With the trend toward corporate activity in the sector, he expects Scottish Media Group could be well positioned to unlock value.

John Hatherly, head of global analysis at M&G, is bullish about BSkyB. And Disney could be worth a punt if you believe Comcast will come in with a higher bid.

He also recommends Daily Mail & General Trust. "You don't normally look on newspapers as a growth industry but the Daily Mail is increasing its circulation so it is bucking this trend," he says.

Joe O'Donnell, private client manager at BWD Rensburg, says that for investors who do not expect a strong economic recovery, Reed Elsevier could also be worth consideration.

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