Media Stocks: How "Safe" Are They In Wall Street Crisis?


Let's face it, nearly every industry will be touched by the turmoil on Wall Street. And as I've reported many times, the already-suffering ad industry is sure to be further hit. There are a couple issues now in play.

One, as consumers pull back their spending, marketers will reign in their ad dollars and they're sure to cut back in traditional areas like radio and newspapers that are already suffering.

Television ad dollars are already locked in for the rest of the year, so advertising spending will likely hold relatively steady through the fourth quarter of 2008, but it's 2009 when advertising could really suffer.

Then there's the fact that financing will be harder to come by. That will affect the film studios ability to partner with Wall Street to reduce their risk, which means they'll end up taking on a bit more risk, and turning elsewhere (i.e. overseas) for financing.

So who will be hardest hit? The least diversified companies with the greatest exposure to advertising. A prime example is CBS Corp: it's the media stock most exposed to advertising markets. CBS stock has fallen nearly 50 percent over the past 12 months, and even though CEO Les Moonves is optimistic about the CBS network's performance, the bast majority of the company's revenue comes from advertising.

Which companies are safest in the near term? Probably those with the least exposure to the ad market. DreamWorks Animationand Marvel Entertainmentare both pure-play movie studio stocks, with zero exposure to advertising. Sure, they rely on people buying movie tickets and DVDs, but the box office has traditionally been counter-cyclical, booming during recessions.

DreamWorks Animation, led by Jeffrey Katzenberg, has invested heavily in digital 3-D, which promises to fill theaters at higher ticket-prices. And the studio has a Madagascar sequel out this fall and much-hyped and highly-promising "Monsters vs. Aliens", its first 3-D flick, out next year. Marvel broke box office records with "Iron Man" and has other films based on its characters in the works.

What about the weak dollar? News Corp has hefty exposure to advertising, and with its portfolio of newspapers, especially the traditional ad markets. But News Corp's significant international presence, both with those papers and its Sky Italia satellite TV division, has really been benefiting from that exchange rate. And while Disney'sparks and consumer products division are both obviously exposed to consumer spending, the parks division especially hsa been benefiting from the weak dollar making the U.S. a huge tourism destination for Europeans.

And what about the new scarcity of Wall Street financing? Sure some movie studios will be taking on less risk, but the reality is that media giants are less reliant on Wall Street financing than companies in other sectors.


So what should investors look for in the long term? Diversified large-caps that aren't too exposed to the ad markets. Many Wall Street analysts continue to be bullish on Disney.

While ABC is exposed to ad markets, cable networks like ESPN bring in subscription revenue. And the company has established brands--like Pixar and Disney Channel--that have high barriers to entry, to say the least. And the company must be confident in its parks division; just this week announcing it's expanding its vacation club with two new development projects.

And one thing worth remembering--valuations across media are at historic lows.

Questions? Comments?