MARKET COMMENT
Media Mayhem

By Christopher Spink
March 22, 2001

The media sector has lost nearly a fifth of its value this year. Investors regard the industry as notoriously cyclical, rising and falling in line with the economy as GDP grows and shrinks.

Last year the new economy was about to usher in an era of unprecedented economic growth. Many companies rushed to spend money on advertising their products. This prompted everyone to rush out and buy shares in media concerns. This year, when all anyone can think about is the downturn in the US and Japan and how that might affect the UK, the same investors sell up their media stocks just as quickly.

The nature of these cycles means that investors try to keep one step ahead of actual events and anticipate changes. This exaggerates swings, meaning that canny or Foolish investors should buy media companies when things look gloomiest (this year) and avoid them when fortunes are at their rosiest (last year). Of course, hindsight is a wonderful thing.

This is why this morning's trading statement from the UK's leading commercial radio broadcaster Capital Radio (LSE: CAP) has sent the shares reeling 20%, down 167.5p to 710p. Investors pounced on the forecast that: "a continuation into the second half of the current conditions in our advertising markets would be likely to result in reported profit for the year being at least 10 per cent lower than that achieved last year."

This downturn in advertising revenue has affected most media companies. Other radio broadcasters have been affected, such as GWR (LSE: GWG), which owns Classic FM, and SMG (LSE: SMG), which has the Virgin Radio franchise.

Riding out a recession

The sector's three largest companies, satellite TV broadcaster BSkyB (LSE: BSY), publisher Pearson (LSE: PSON) and Reuters (LSE: RTR) are also showing share price drops of up to a third so far this year. This prompts the question whether any media companies are immune to these vicious cyclical swings?

Only five companies have risen in value so far this year. One is Taylor & Francis (LSE: TFG). This group publishes academic journals. With university spending rising and relatively recession-proof, the company has reported excellent results today showing strong organic growth and an optimistic outlook for 2001.

The other surprise is that the world's largest advertising agency WPP (LSE: WPP) has managed to avoid much of the flack many rivals have received. The group's major clients are producers of household goods and food such as Procter & Gamble (NYSE: PG) and Unilever (LSE: ULVR). These companies have to continue advertising whatever the economic weather, making WPP's contracts relatively secure.

But if you want a real bargain and have enough courage to be contrarian then leading media companies such as Reuters, BSkyB, Pearson and Capital Radio, all of which have fallen dramatically this year, may be worth looking at soon. All four have strong franchises that should be sustainable through any downturn.

More: Media Magic Melting Away (Comment, 23rd Feb)