Success in short term is a real long shot

The share prices of many media companies are bumping along at, or near, record lows as the sector suffers from a prolonged cyclical downturn and accelerating structural change. By contrast, the largest locally listed media stock, the US-based News Corp, has outperformed the sector, with its portfolio of global television assets still growing strongly. Among smaller stocks, brokers favour the online classified plays Seek and Carsales.com, which have outperformed their compatriots.

Seven West Media had been among the best-rated stocks but an unexpected earnings downgrade late last month prompted a re-rating by some brokers, with hold or sell recommendations outnumbering buy calls by two to one. However, the brokers' target price of $3.51 is still well above yesterday's close of $2.56.

Ten Network, too, has been approaching lows, closing yesterday at 69?. 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 (publisher of the Herald) touched new lows this week, and more analysts recommend selling or holding the stock than buying it. One said while the company had done a good job so far of moving into digital, the uncertainty in the direction of the advertising market would continue to weigh on the stock, despite the fact that record lows were sometimes seen as a buying opportunity.

All media companies depend on advertising to survive, and the $13-billion local market has shown few growth signs as a whole this year, with online growing at the expense of print newspapers in particular.

Just this week, a global consumer sentiment survey by Boston Consulting found Australian shoppers were among the most financially insecure in the world, and planned to rein in spending further.

"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," the Citi media 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 added.

Analysts are struggling to define when the cyclical downturn might end, and the point is further confused by the escalated shift to online, otherwise known as the structural shift, which has hit margins throughout the 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 performer, 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 declined by 12 per cent and 10 per cent respectively.

The 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".

"If April (advertising) trends continue, we highlight upside to our online forecasts (much of which is captured by Facebook and Google), modest upside to our free-to-air ad market forecast and downside to our newspaper forecasts for FXJ [Fairfax] (metro and regional), SWM [Seven West] and APN," she added.

Diddams said the lack of depth in the 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. And when you look at the stocks available locally, there are questions about their long-term future structures."