Advertising-supported media stocks soared on Monday and Wednesday as the stock market rallied sharply as the fiscal cliff negotiations led to a deal. Estimates for 2013 advertising growth had been coming down steadily since summer. Mostly, prognosticators, including Wall Street analysts, were focused on the possibility of a weak consumer spending environment in early 2013 if tax increases kicked in.
The final agreement does raise taxes sharply on income above $400,000 for individuals and $450,000 for joint filers. This impacts less than 2% of households. Lower and middle income taxpayers did not avoid a tax increase. The 2% cut in payroll taxes, from 6.2% to 4.2%, was not renewed. Overall, Ned Davis Research believes the hit GDP will take in the first quarter will be about 0.5%, including a hit of $85 billion to consumer spending.
This is far from the worst case scenario. I believe it is a better outcome than many of the recent forecasts of ad growth for 2013 assume. I also believe it is better than the many cautious comments from executives at major advertisers, ad agencies, and ad buyers that have received a lot of press over the past several months.
Executives at media owners have remained uniformly bullish on advertising trends, especially related to national TV advertising. Media owners point to the strong recoveries for autos and housing and normal levels of upfront cancellations. Uniformly, executives point to a healthy scatter market with pricing above upfront levels, with double digit gains for networks with good ratings.
It is always hard to get a read on what is really going with ad demand and pricing as the players on all side will talk their book in public. Stock prices of cable and broadcast network owners have acted quite well even when pessimism about the fiscal cliff and 2013 outlook was rising. To me, that suggested that ad markets were staying healthy. There is no guarantee; as we learned in 2007-2009, strong markets can get very weak, very quickly.
With the fiscal cliff resolved -- at least the tax portion -- estimates for 2013 advertising growth seem set to rise. This explains the big pop in media stocks including gains (as of 3:10 p.m. ET on January 2) of 2.3% for CBS
(NYSE:CBS), 2.6% for Discovery Communications
(NASDAQ:DISCA), 3.7% for News Corp
(NASDAQ:NWSA), 2.9% for AMC Networks
(NASDAQ:AMCX), 2.2% for Scripps Networks Interactive
(NYSE:SNI), 2% for Disney
(NYSE:DIS), 3.3% for Time Warner
(NYSE:TWX), and 5.8% for Viacom
(NASDAQ:VIAB). SNL's own Derek Baine issued a 2013 forecast
of 1.3% advertising growth for the US market last week. This represents a slowdown from 2012 growth of 3.5%. Excluding the Olympics and political spending in 2012, the growth rate is 1.2%. So on an apples-to-apples basis, Derek sees similar growth in 2013. Interestingly, his forecast for 1.2% growth is below his long-term forecast that calls for a 2.7% CAGR through 2012. Derek back-end loaded his forecast on the assumptions that the sluggish recovery continues.
For TV, Derek sees a pickup in growth for cable networks from 8.2% in 2012 to 9.1% in 2013. Market share gains via relative ratings gains versus broadcast networks likely drive the growth. Derek sees negative growth for broadcast networks, but that is driven by the loss of Olympic and political revenue.
Derek’s forecasts are similar to most of what I read from Wall Street analysts. I think they could prove low, especially now that the bulk of the tax increases related to the fiscal cliff have been avoided. There is still a tough negotiation coming over spending cuts and the debt limit. Spending cuts can hurt consumer spending just like tax increases. The debt limit has already shown once the ability to morph into a threat to the economy. As a result of the still-pending negotiations in Washington, I do not expect forecasters to raise their ad growth quite yet. However, we have cleared an important hurdle while housing and auto sales seem to be in an accelerating recovery. Fed policy is likely to remain very easy even if the economic growth picks up – the Fed will not want to take any chances.
The bull case is there and has been strengthened by avoiding the cliff on taxes. Stock prices are responding appropriately and I think more upside lies ahead.
CBS and Discovery Communications are widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. CBS, Discovery Communications, and News Corporation are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.
This column was previously published by SNL Kagan on www.snl.com.
No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic=
ations, and related technologies. Steve Birenberg is co-portfolio manager o=
f Entermedia, owns a stake in the Funds' investment management compan=
y, and has personal monies invested in the Funds. CBS and Discovery Communi=
cations are widely held by Northlake Capital Management, LLC, including in =
Steve Birenberg's personal accounts. Steve is sole proprietor of Nort=
hlake, a long only registered investment advisor.
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