Investment: Should you invest in... the media?

FOR THE investor, the term "media" covers a multitude of sins, which makes the business of comparing its constituents extremely tricky. "You have to deal with the sector stock by stock," says Jeremy Batstone of NatWest Stockbrokers. "For example, what is EMI (music distribution) doing in the same sector as WPP (advertising)? And in three years `third generation' digital licences will give rise to a whole new range of integrated media services."

But certain themes affect all media stocks, such as advertising revenue. John Hildebrand of Invetsec Guinness Flight says: "The economy was stronger than we expected at the start of the year, which meant ad revenues have been higher than predicted."

Neville Harris of Hill Samuel says: "The media sector is struggling. There was a good rally early in the year, as investors realised the sector was oversold and they were looking for what you might call a `quasi-cyclical' play. But it has largely gone sideways since."

Peter Dale of Pavilion Asset Management says: "The key drivers of the sector are cash flow, visible earnings growth and advertising volumes. Volatility is going to remain. The market is short term - you can be looking very good one minute and off 10 per cent the next. It is a difficult sector to call and we don't have any particularly large bets in it."

Neville Harris says: "Investors find they cannot see what the growth drivers are or where it is going over the next two to three years. In other growth sectors, IT or telecoms, the path of growth is pretty clear, but in media, the waters are muddied, apart from radio, which is clearly on a secular growth trend because of the way the stations split revenue. A major theme is the threat, or opportunity, of technological developments. The problem for investors is how the new technology will affect businesses. We can see growth in certain areas and we do favour advertising agencies. The growth in ad revenues is established and a global recovery is unlikely to harm that business."

John Hildebrand says: "If ad revenues remain healthy, that is good news for newspaper publishers. Newsquest has already announced strong results. It would have an effect in TV. Carlton has not been doing well, but says its ad revenue was up 12 per cent in the first quarter."

Peter Dale says: "Stocks like WPP, United News and Emap depend heavily on the US for advertising revenues, and companies like Carlton, Capital Radio and Aegis are more dependent on the UK. Companies like Reuters, Pearson and BSkyB are relatively defensive. Even if there is a slowdown in some parts of the global economy, they should be well insulated."

John Hildebrand says: "These cyclicals are a relatively safe place for investors to put money. Stocks that look reasonable are companies like Carlton. The market is against the stock because it is worried about the challenge it faces from Sky in digital broadcasting. This means Carlton will have to put more money into developing ONdigital, but they should reap the benefit later. Carlton is seeing no return now from ONdigital, but when its revenues start showing in the numbers, instead of having losses, Carlton will suddenly start to look cheap."

BSkyB and Carlton dominate development of digital TV, but Jeremy Batstone says: "The growth of the media sector is about convergence of technology through digitalisation, connecting PCs, telephones and electronic equipment," he says. "Stocks like Telewest are going to become media companies. There are three major cable networks - Cable & Wireless Communications, Telewest and NTL - which each have digital TV plans to take on BSkyB and Carlton. But on their own each is too small."

An irresistible force is bringing them together. "It looks like Microsoft is going to broker a deal to combine the three, which would create a company big enough to take on the two existing players," he adds. "Microsoft has a 5 per cent stake in NTL and 29 per cent of Telewest because it wants to get into digital TV. Microsoft is using the UK, which is ahead of everyone else in terms of digital television, as a testbed for expansion in the US." Neville Harris feels investors should focus on who is running the companies. "The two worst are Reed and EMI," he says. "There has been a marginal improvement at EMI recently, but it is still poor at Reed."

John Hildebrand says: "Reed's share price has collapsed. It is suffering from bad management and revenues will be hit if there is a downturn. A lot of its revenue comes from recruitment advertising, and that suffered because much of it is IT-related. This stock usually trades at a premium to the market, but it is at a large discount."

Jeremy Batstone agrees. "Reed has been looking for a chief executive to give it direction for a long time," he says. "If it was a high- profile appointment, the shares might bounce, but it is a case of waiting to see who comes along."

Neville Harris says: "The four companies to put a gold star against, are Emap, Pearson, WPP and Daily Mail, although the first two have high- profile recent acquisitions they have to make work. Accounting provisions over Pearson's acquisition of Simon & Schuster has dogged its share price since it was announced. But Pearson is our strongest view amongst the larger companies, because its earnings look solid."

John Hildebrand says: "Pearson had looked overbought and although it has come back recently we still think it is a bit expensive. A better option might be Reuters where the share price has kept up with events but still looks to have good prospects over the longer term".

Reuters may have other ambitions. Jeremy Batstone says: "Reuters is keen to have itself reclassified as an Internet stock. When media was a small sector, it was happy to be in, but now it wants to get out, in part because its share price has been so volatile. It is also probably hoping for a share price uplift because IT stocks are more highly rated than media stocks.

"Reed and Reuters were early into electronic publishing and for a while they were perceived as being state of the art. But things develop so fast in that sector both are finding it more difficult to differentiate themselves from the competition".

Neville Harris says: "Clearly, newspapers have scope for restructuring - you have the Mirror Group - because it is a reasonably mature industry which has got to get its cost base down. There's a good chance of activity, provided competition authorities don't see a problem with a regional publisher running a national newspaper."

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