Advertising revenue is the very oxygen of a sector a bit short of puff, writes Kirsty Simpson.
BUYING into the local media industry is one for the brave-hearted, analysts agree. As the tailwinds from the latest eurozone turmoil buffet Australian markets, buying into the sector brings more uncertainty.
The share prices of many local media companies are bumping around at or near record lows as the sector suffers from a prolonged cyclical downturn and accelerating structural change.
But by contrast, the largest locally listed media stock, the US-based News Corp, has outperformed the rest, with its portfolio of global television assets still growing strongly.
Among smaller local stocks, brokers also favour the online classified plays Seek and Carsales.com, both of which have outperformed their compatriots.
Seven West Media had been among the best-rated stocks, but an unexpected earnings downgrade in late April prompted a downgrade by some brokers, with hold or sell recommendations out-rating buy calls two to one.
But the brokers' target price of $3.51 is still well above yesterday's close of $2.56.
Ten Network also has been approaching all-time lows, closing yesterday at 69.5?. As with Seven West, a shock earnings downgrade earlier this year, and its inability to gain ratings or ad market share has made investors wary. Only two brokers rate the company a buy, with 13 recommending holding or selling. Fairfax Media (owner of The Age) touched record lows this week, and more analysts recommend selling or holding the stock than buying it. One said that while the company had so far done a good job of moving into digital, the continuing uncertainty in the direction of the advertising market would continue to weigh on the stock, despite record lows sometimes seen as a buying opportunity.
All local media companies depend on advertising to survive, and the $13 billion local market has this year shown only few signs of growth as a whole, with online growing at the expense of print newspapers, in particular. Just this week a global consumer sentiment survey by Boston Consulting found that Australian shoppers were among the most financially insecure in the world.
"The media sector relies heavily on advertising, and the ad market reflects the overall consumer backdrop and the economy, neither of which are great at the moment," Citi analyst Justin Diddams said.
"If you are investing in the sector you need to take a much longer-term view of the ad cycle, but the difficulty is investors need to get comfortable with the long-term structural shift to digital," he said. Analysts are struggling to define when the cyclical downturn might end, and the point is further confused by escalated shift to online, otherwise known as the structural shift.
Industry figures show the advertising market has risen just 0.4 per cent in the first four months of the year.
Online has again been the best performing, growing at a 25 per cent clip, well above some analysts' forecasts.
Free-to-air television has fallen 2 per cent over the period, but newspapers and magazines have fallen 12 per cent and 10 per cent respectively.
Commonwealth Bank analyst Alice Bennett told clients this week the latest figures meant no change to its recommendations of a buy for News Corp, with its "solid growth potential, strong balance sheet and upside from capital management".
Mr Diddams said the lack of depth in the Australian listed media market had marginalised the sector, meaning "for investors at the moment it is a bit of a 'hero or zero trade', if the advertising market turns around.
"Something that retail investors need to be aware of is that media companies used to be highly cash generative, but in a lot of cases that cash is now being used to pay off debt."