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Are European media stocks set to recover?

Source: Reuters - Fri 18th Sep 2009

The once-beleaguered European media sector, the worst performing index in the second quarter, is making a comeback, but while the business-to-business space is performing well, caution exists among broadcasters.

The DJ STOXX European media index, the worst performer in the second quarter, only returning 1.53 percent, is now outpacing 10 out of 18 other sectors in Europe in the third quarter.

Top picks among fund managers included United Business Media, Reed Elsevier and Informa for their steady subscription-based income streams, and Publicis, because it is geared towards economic recovery.

However, companies were being chosen only on a stock-specific basis, with fund managers avoiding broadcasters because of concerns that revenues would be hit by advertising going on to the Internet.


Fund managers were favouring the business-to-business space as companies have strong balance sheets and have been able to generate revenues despite the recession.

Professional publishers are on a free cash flow yield of 7.2 percent for 2009 earnings, with the only other sectors higher telecoms and healthcare.

"As time goes on it is coming out that these businesses are sustainable. These companies have very good de-gearing potential because of their low capital intensity and resultant high cash generation. There is significant upside to these stocks" said Jamie Seaton, a fund manager at SVG Investment Managers. 

For example, British media group UBM said in late July it was on track to meet 2009 market expectations and raised its dividend, while Informa said it would probably exceed last year's adjusted operating profit margin.

The stocks were up 19 percent and 42 percent, respectively, since the beginning of this quarter, compared to 6.2 percent and 1.2 percent falls the previous quarter.

Meanwhile, Goldman Sachs has recently added Reed to its "conviction buy" list and said that "margins should be supported by (its) cost saving programme."

Reed is up 5 percent this quarter compared to dropping nearly 10 percent in the previous one.

There is some good news for companies who depend heavily on the advertising market. Zenith Optimedia forecast that the downturn in global advertising is approaching its lowest point and, after a fall of 8.5 percent in 2009, the industry should see a mild recovery in 2010.

A stock that managers think will benefit from this upturn in advertising is Publicis, and fund management group SWIP holds the company in their European portfolios.

"Publicis quarter two results were solid and margins have held up well. The market also likes it for its potential when a recovery starts to happen," said Chris Clarke, investment director on the European Equity team at SWIP.

Publicis shares have been steadily gaining this year and are up around 42 percent, following a 31 percent slump in 2008.


However, managers and analysts were still wary about advertising for broadcasters and said some television companies had already outperformed to a level where there was unlikely to be any further upside.

Goldman Sachs said recently in a note that TF1 was overbought and downgraded the company to "sell". The stock trades at 11 times normalized/2012E P/E versus broadcaster peers at 10 times and the media sector 9 times.

The broker noted that TF1's third-quarter results, due on November 10 are likely to show continued pricing pressures.

Fund management group Invesco also does not favour broadcasters.

"We are staying clear of broadcasters in continental Europe because they tend to be exposed to the advertising cycle and balance sheets on a whole remain fairly stretched" said Luke Stellini, product director for European equities at Invesco.

Seaton does not have any exposure to broadcasting as he said the sector is structurally challenged by new forms of media such as the Internet.

"We use to sit around and watch television but now we are spending time surfing the Internet and accessing media in different formats," Seaton said.

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