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MARKET COMMENT
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Think back to Monday 10th January 2000. That was the day when America Online (NYSE: AOL), then valued at a massive $165 billion, announced it was to merge with Time Warner (NYSE: TWX), valued at $76 billion prior to the bid. That news catapulted the UK media sector into the stratosphere, and in the process helped fuel the January to March 2000 technology market madness. In hindsight, the AOL Time Warner transaction was the beginning of the end for many dot coms. It's just that it took most people six months to realise it. Give AOL credit. They were ahead of the curve, and could see the writing on the wall. Growth in their consumer facing ISP business was bound to slow as the Internet quickly matured. Critics would say that they had to do something in order to prop up their highly rated shares. Admirers would say that it was a masterstroke, taking them from a company 100% reliant on the Internet to a global media giant. The dot com fallout has been well publicised. But what of media companies? After a roller coaster ride in 2000, as a group they finished the year dead flat. With the UK economy set to slow over the next 12 months, media companies will feel the heat as clients cut their discretionary marketing spend. Yet they still trade on an average price to earnings ratio (P/E) of over 60, albeit that this figure is somewhat inflated by BSkyB's (LSE: BSY) forward P/E of 136. Is the market missing a trick? It looks like it. Putting BSkyB to one side -- it is investing heavily for the future, hence the massive P/E --, Reuters (LSE: RTR) and Pearson (LSE: PSON) both trade at P/E's in the 30s. WPP (LSE: WPP) and Reed International (LSE: REED) both trade at a premium to the market. Of the biggest media companies, it's only when you get down to Emap (LSE: EMA) -- 11th biggest, market capitalisation of £2.2 billion and P/E of 21 -- that you find a company trading at a (slight) discount to the market. And they're no bargain! That's disappointing news for both existing and potential media sector investors. In the short term, existing sector shareholders are likely to see the value of their holdings fall. But over the long term, the media sector remains attractive, provided you buy at the right price. Unfortunately, that "right price" is a long way off yet. Where Next? The Motley Fool's Industry Focus 2001 covers the media sector, highlighting two smaller companies for investment consideration. On sale now for £24.