The economic downturn was brutal for the ad industry.
Advertising is the first thing to get cut when companies grow
cautious, and ad budgets are only now beginning to thaw out.
Investors have spotted the turn, bidding upshares of key players.
But if you have a 3-4 year time horizon, you've only missed the
first stage of the multi-year sector rebound.
I attended a recent UBS advertising/media conference and couldn't
help notice the broad-based bullishness coming from the various
industry executives at the podium. Revenue across the ad industry
is rising at a 7% to 8% clip this year. That's a surprising figure
when you consider that the broadereconomy remains in a deep funk.
The bounce back is simply a function of really weak ad spending in
As a general rule of thumb, industry revenue grows or shrinks at
twice the rate of broader economic growth. So if theeconomy grows
3%, the industry should grow 6%. In that context, industry sales
may grow at a more modest 5% next year if theeconomy stays in a
Yet looking out over the next few years, the ad industry may do
even better. Many firms have beefed up their skills in the areas of
social networking and mobile advertising, both of which are
becoming a bigger focus among corporate marketers. And the biggest
ad spenders are springing back to life:
- Auto makers, which historically account for 15% of ad
industry revenue, are boosting their budgets now that they are
financially healthier and have many new models to peddle.
- The wireless phone services sector, which is the second
biggest source of ad spending according to market research firm
Kantar, will be pushing hard to sell 4G phones and data service
plans in 2011.
- Financial services firms are also starting to bounce back,
and have also comprised upwards of 15% of total ad spending.
Here are my three favorite current advertising plays:
I hate recommending a stock that has jumped from $7 to $11 in the
past five months, butshares may still surge well higher from here.
Interpublic is one of the world's largest ad agency holding
companies after acquiring dozens of firms in the last decade.
Interpublic now has a strong presence in
and is also considered to be one to the most innovative digital
But that spending spree led to a high cost structure, minimal
synergies and a debt-laden
. So in the past two years, management has taken a hatchet to
costs, sharply reducing debt in the process. The company is now in
much better position to generate improved results. As industry
revenue continues to rebound,
is expected to exceed $500 million this year and $750 million in
2011. That has led management to hint that a share buyback or a new
could be announced in coming months.
Despite all the positives and the recent share price rebound,shares
still trade for less than five times projected 2011 EBITDA, on an
basis. Most analysts deploy price targets that are a few dollars
above current levels -- because they are looking at projected 2011
results. If you look out beyond 2011, you can make a case for 50%
or even 75% upside forshares in the next few years.
MDC Partners (Nasdaq: MDCA)
Looking for a more unconventional ad industry play? MDC has been
focusing on the high-tech angle of advertising. More than 40% of
sales are derived from interactive advertising. In addition, MDC
derives almost all of its revenue in the United States, a key
consideration when Europe is looking a bit shaky at the moment. ["
If the Euro Crisis Deepens, Here's What it Means
MDC's executives sure are bullish on the company's prospects. In
the past year, a dozen of the firm's officers and directors have
bought a collective 284,000shares , and none has sold a single
share. That buying took place even asshares were reaching 52-week
But this is no longer a well-kept secret after doubling from the
52-week low. Indeed most analysts thinkshares are now fully valued
when compared to near-term results. So the appeal of MDC lies in
the multi-year growth plan ahead of it, especially as a key play on
the Twitter and Facebook generation.Shares look pretty pricey in
profits, but are more reasonably valued at about eight times
projected 2010 EBITDA. That's a bit higher than rivals such as
, but MDC's growth prospects appear to be the strongest in the
DG FastChannel (Nasdaq: DGIT)
Lastly, I'm a big fan of DGIT's
, which helps TV broadcasters maximize ad revenue streams.
Shares have rebounded smartly since I profiled the company
, but they still trade at reasonable multiples: profits are growing
at a 30% clip, yet the 2011 price-to-earnings (
) multiple is in the low teens. Business looks back on track after
a mid-year scare, and the company has almost no competition. And
rising TV ad spending plays right into DGIT's hands...
Action to Take -->
After an impressive rebound, theseshares don't look like a great
near-term trade, but rather solid long-term investments. I'm
the market is over-extended
after a recent rally, yet if we see any pullback, that would set
these stocks up to be fresh short-term trades, in addition to the
long-term value they possess.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.