It looks and smells like recovery

Mar 25, 2002  •  Post A Comment

It’s difficult at this stage to know where wishful thinking ends and reality takes over, but Wall Street clearly believes that advertiser spending and the general economy are improving more quickly than originally expected.
That raises at least two pressing issues: whether a recovery-by any measure-is sustainable and how quickly any upside will find its way to the corporate bottom line.
A stream of upbeat industry analyst reports last week wrestled with both questions, declaring an end to what historically is the shortest recession on record. Still, even the most optimistic analysts are only willing to concede that media companies generally will avoid last year’s steep losses even if they don’t see much in the way of gains.
But there is reason to remain cautious. The economic and advertising recovery is as fragile as it is real. Media companies have learned the hard way in recent years the perils of overpromising.
Any increased ad spending is going to compare well to declining year-ago levels, setting back the clock to what was considered “more normal” ad-spending levels before the year 2000’s double-digit pricing spike.
What’s behind it?
There are mixed sentiments on Wall Street and on Madison Avenue about how much of it is pent-up spending vs. new spending by advertisers, the latter of which would assure a much stronger upfront market.
“We’re seeing advertisers who deferred the second half of last year now coming forward because they had a good Olympics experience or have timely campaigns to support,” one veteran ad agency executive told me last week.
But a leading broadcast network executives I spoke with disagreed. “It’s all new spending-it’s new money coming back into the market. As long as nothing major occurs to drive them away again, the advertisers are here to stay,” said the executive, who bullishly predicts a 5 percent to 8 percent increase in broadcast upfront spending. Cable, he said, will be able to make up half of its losses from last year.
Christopher Dixon, an analyst at UBS Warburg, said the truth lies somewhere in between. “Everyone is lying, because everyone is speaking from their own self-interest. No one knows what the upfront will be, because a lot can happen between now and then,” he said.
“The upfront market is a classic futures market,” Mr. Dixon said. “There is very little near-term implication for the status of the upfront market.”
Still, last week UBS raised its estimates for overall advertiser spending in 2002 to nearly 2 percent over last year, from prior estimates of negative 2 percent.
When pushed, Mr. Dixon and other veteran industry analysts hinted they would not be surprised if this year’s upfront ad spending was up 4 percent or more on improved March ad pacings and strengthened economic indicators.
The gross domestic product, or GDP, which is considered a traditional barometer of advertiser spending, recently jumped by nearly 4 percent.
Even more to the point, a UBS Warburg study found better-than-expected increased spending right now by advertisers in eight of the top 10 ad categories.
Spot is bright
The first of Wall Street’s upbeat reports, which declared “the worst is over,” noted that national spot sales in March have been pacing up 18 percent compared with a 10 percent decline in January. UBS Warburg said that while ad spending in April may be weak, it could shoot up as much as 4 percent in May.
In a second UBS report last week to clients, Mr. Dixon said he sees enough positive signs to advise investors, “After six months of advocating `buying the dips,’ it’s time to let ’em run.”
Lehman Brothers was the next to follow suit, observing that the advertising market is “firming up” and spending outlooks are “improving.” But Lehman analyst Stuart Linde looked beyond the advertising situation to other related matters. While all of this is good news-and real-it will not immediately translate into an improved financial outlook for media companies, “who need increases in their cash flow growth to offset the recent decreases in their multiples” if they want to buy or sell during the next wave of consolidation, he said.
Experts agree that it will be at least six to nine months-or at the earliest the fourth quarter of 2002-before media company quarterly revenues and earnings begin to reflect increases in advertiser spending or subscription fees. That’s because any recovery is expected to be gradual and spottier than it is steady.
Mel and Rupert are bullish
Viacom President Mel Karmazin and News Corp. Chairman Rupert Murdoch, as well as executives at mid-tier media players such as Gannett Broadcasting and Tribune Broadcasting, were among the first to hint at an advertising upturn during their companies’ recent earnings calls. March scatter and spot advertiser spending is markedly better than it was in January and February but is expected to dip again in April.
Bear Stearns went about as far as any investment bank last week, raising its overall television ad spending estimates to 5 percent in 2002, up from a prior 3 percent to 4 percent. Bears Stearns also introduced 2003 estimates of 2 percent overall media industry growth.
The firm also revised some media company earnings modestly upward. For instance, it now expects Hearst-Argyle Television, clobbered badly by ABC’s weak ratings, to post 8 percent growth in overall cash flow this year compared with 2001 on a 4.4 percent gain in net revenues. Sinclair Broadcast Group will post a 4 percent increase in cash flow over 2001 on 3.5 percent gains in net revenues this year. Belo is an even better story, now expected to post 7 percent cash flow growth over last year on nearly 2 percent gains in net revenues, Bear Stearns said.
All of this may appear very incremental compared with the mega gains of recent years, but it constitutes a move in the right direction, experts said.
Besides, it would be wrong to expect a return to the robust gains of the past. The increasing fragmentation of ad dollars and viewers will prevent that from happening.
Hard line at upfront
For the major media players, the positive impact of a recovery will be even more profound and swift.
With scatter market pricing “pacing above” last year’s upfront market and led by Viacom, whose second-quarter scatter prices could be up 5 percent to 15 percent. News Corp. executives said they may realize a more broad-based 5 percent increase across the company’s broadcast and cable businesses.
Still, some analysts said last week they expect Viacom may be joined by other broadcast networks this year in holding back some upfront inventory in hopes of realizing bigger pricing gains later this year on the strength of a continuing recovery. Ratings-ravaged ABC is the only broadcast network generally expected to “break pricing” and sell what it can in the upfront, Mr. Linde said.
However, Mr. Linde and other analysts have made the point that they believe overall upfront ad spending will be virtually flat at about $7 billion. In other words, advertisers will show up but not commit more than their usual sums in some cases.
Mr. Linde and other analysts also cautiously noted that they are not sure how much of the strength Viacom and NBC are showing in week-to-week ad sales is real and new or simply coming as a result of last month’s Olympics and a tightening of ad inventory by excessive advertiser make-goods at ABC and Fox that also is greatly benefiting cable networks. A continued tightening of inventory will naturally lead to increased pricing across the board.
Mr. Dixon said the strength of the upfront will depend in large part on the strength of corporate spending on advertising and marketing, which would be closely linked to improved corporate revenues and earnings not expected until later this year.
Bear Stearns hinged its improved outlook last week on national advertising growing faster than local advertising-and increasing “significant” amounts of “pending business,” or ad dollars that will likely be committed but are not yet officially scheduled to air.
The recent upturn in radi
o advertising could push overall broadcast industry revenue growth to 3 percent or 4 percent over the flat growth originally forecast. Significant political advertising on stations during the second half of 2002 could push overall industry revenue growth to nearly 5 percent, the report stated.
But a jolt to the economy could just as quickly destroy the newfound recovery movement, all analysts and economists concede, which means we still are in a “show me” mode. And broadcast and cable companies are eager to do just that.