The Investment Column: Uneven recovery for media stocks

Improved Jessops is not quite picture perfect - Morrissey helps Sanctuary Group hit the right note
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The Independent Online

Since the heady days of the internet boom, the media industry has been waiting for the good times to return.

Since the heady days of the internet boom, the media industry has been waiting for the good times to return.

No one was predicting a re-run of the frenzied advertising expenditure of the late 1990s, but a bounce-back was keenly awaited. The rebound's pickings this year have been uneven and not nearly as generous as media companies had hoped for.

Furthermore, while there was decent growth in ad expenditure - some 5 per cent in 2004, after a three years of contraction - next year looks set to see a slowdown in the rate of growth to maybe as little as 2 or 3 per cent.

The reason is the absence of the one-off factors that boosted this year's spend (the Olympic Games, European Football championships and the US election), plus such macro-economic negatives as the massive US budget deficit and high oil prices.

Analysts at JP Morgan in a research note published yesterday asked whether media stocks are cheap. The broker pointed out that European media shares are trading at a 23 per cent discount to their long-term adjusted averages and broadcasters are down 33 per cent. The chart shows that major UK media stocks among them, with the exception of Reuters, have not fared well this year.

Does this mean that media stocks are now looking cheap? The sector may not be enjoying the high rating it is used to, but professional publishers are still at a 15 per cent premium to the European market, while broadcasters are at a 40 per cent premium, JP Morgan said.

There are good reasons to believe that the sector will not return to its long-term stock market rating in the foreseeable future. New technology, such as personal video recorders, plus evidence that companies are going for price cuts rather than brand promotion, are looming big structural problems. Investors should treat the sector with great caution.

Improved Jessops is not quite picture perfect

Jessops was not a pretty picture when it listed on the stock market last Friday. Had the photographic retailer not dropped its flotation price at the last minute, it might be gearing up for a tertiary private equity buyout rather than reflecting on the perils of trying to price its stock too high.

Fundamentally, Jessops is a promising business. The 70-year-old retailer is the country's biggest specialist camera chain. It has 263 stores, 70 more than it had when it first tried to float four years ago. It has grown margins, underlying sales and profits encouragingly during the past four years, managing a 6.1 per cent jump in like-for-like sales during the past year and a 14 per cent rise in underlying profits.

It is possible that like HMV, another specialist retailer, Jessops will one day command a premium rating. But the market clearly believes it has to earn that privilege.

In Jessops' favour, shoppers are snapping up digital cameras. Less than 30 per cent of people already own one and the market is forecast to grow by one quarter to £2.7bn by 2008. It also plans to open 20 extra shops a year, until it gets to 450.

That said, retailers from Boots to Argos are fighting to sell digital cameras, providing some fierce competition, even for a specialist. And just because four-fifths of the population own a traditional camera, it doesn't follow that the take-up for digital photography will be anything like that high.

Its shares rose 2p to 152p yesterday, still shy of the original 185p to 220p price range. The p/e ratio of 11 times looks about right, at least until Jessops has had time to prove itself.

Morrissey helps Sanctuary Group hit the right note

The devoted fans of artists such as Morrissey, whose latest album sold more than 700,000 copies, and The Libertines have helped Sanctuary Group weather the downturn in CD sales in recent years.

In a trading statement yesterday, the music company said it had felt some margin pressure, but sales were still strong.

Only 50 per cent of Sanctuary's business is music publishing, however. The rest is artist management services, and Mary J Blige and Nelly have recently signed up, joining artists diverse as Beyoncéand the Manic Street Preachers. Record labels have to pay advances to bands that may subsequently flop, but as a manager, Sanctuary takes a lucrative 15 to 20 per cent of the artists' revenues with little capital outlay.

Sanctuary also runs a live agency that rakes in chunky fees for booking tour dates for sell-out acts such as the Red Hot Chili Peppers. Together with its merchandising arm, its reliance on CD sales is minimal.

Consumer spending power is an issue for the music industry, but at 43.5p, Sanctuary is only trading at about 10 times earnings with good organic growth potential. Add it to your collection.

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