Emerging Markets: A New Hotbed for Media Investors?
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Markets from Brazil to China have stalled since mid-May amid growing expectations that the U.S. Federal Reserve will likely end its $85 billion in monthly bond purchases. This amount was an important flow of easy money into emerging markets at a critical time. In addition, last week, the International Monetary Fund (IMF) lowered its opinion of the global economy's outlook, primarily due to lack of growth in emerging markets.
This has spurred some investors to seek cheap stocks and currencies, believing that the almost two months of outflows have cleared away much of the "hot money" (i.e. hedge funds and investors with a short time frame) that had pushed asset prices higher. Now, they can begin to see faster growth and higher yields than can be found in the developed world.
Advertising: The quiet influencer
Big corporations know the importance of marketing and they are willing to pay for it. Last year, General Motors spent an impressive $4.8 billion on advertising, while rival Ford followed closely with $4.2 billion in ad spending. In another heated battle, AT&T spent $3.3 billion, while Verizon spent $3.6 billion.
The obvious accepted conclusion is that thriving companies spend on advertising. This means that media and ad stocks will likely perform as other consumer-based companies -- poorly when the economy contracts and grow when the economy begins to expand. The consideration then is that media and ad stocks will be the 'first movers' as companies try and anticipate growing spending and get in early on advertising campaigns.
Time Warner operates as a media and entertainment company both in the U.S. and internationally. It has followed the trend of dipping last month (down to around $56 in mid June), but has recently attained a new 52-week high of $62.10. The company currently trades at a forward P/E of 16.78. Additionally, the company’s long-term estimated EPS growth rate is 10.1% and the stock has generated a year-to-date return of roughly 25.2%, which is no small feat.
For all the gaff that it gets, Fox is still doing things right in terms of growth. Most analysts recognize the upside potential of the media titan, noting the Fox Sports 1 network, which will launch next month, and the potential for a higher leverage target, which could mean more buybacks, and multiple expansion now that the slow-growth assets are no longer consolidated.
As the quickest growing of the entertainment conglomerates with an estimated 21% earnings per share growth rate, the stock trades at a lower price/earnings multiple than its growth rate, but at the high end of the entertainment companies, similar to Disney.
Even so, advertising is no longer just an American game, as companies in growing markets such as India and China are recognizing its importance.
Omnicom Group (NYSE: OMC) is a provider of media, advertising, and marketing services throughout the Middle East, Africa, and Asia pacific. Spanning most of the countries that do not rely on outside economic support for growth, the company is benefiting from the upswing in advertising.
Over the past 12 months, Omnicom Group has generated $1.02 billion cash while it booked net income of $999 million. That means it turned 7.1% of its revenue into free cash flow. Most investors ignore, or worse, don't keep tabs on their companies' cash flow. Taking the time to read past the headlines will allow one to not only to spot potential trouble early, but also find the underappreciated home-run stock that might provide a great return.
One Chinese company that recognizes the importance of advertising is Tiger Media, formerly known as SearchMedia Holdings. This is one of China's leading nationwide multi-platform media companies operating integrated outdoor billboard and in-elevator advertising networks.
Last month, the company acquired eight key lease contracts from Symbol Media, allowing it to take 100% control of the eight key Shanghai shopping center locations. According to China Outdoor Data, the Digital Display LCD/Advertising sector is very attractive, with industry revenue growing 35% from $5.4 billion in 2011 to $7.3 billion in 2012.
The correction that is taking place in the global economy has created definite opportunities for those ready (and willing) to enter these emerging markets. It is clear the potential withdrawal of central-bank stimulus has allowed investors to be pickier about what they buy.
It is important for investors to embrace countries that have improved their balance sheet and don't rely on outside funding for growth -- namely China and India. And, as consumerism increases, I see these advertising companies in good positions to gain.
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