If You Believe Bernstein's Estimates, It's Time to Buy Ad Related Stocks

I was taking a look at the Bernstein advertising estimates that called for a -0.3% decline in global advertising in 2009, but for a rebound in growth of 5.5% in 2010 and 5.9% in 2011 and thought that, clearly, Bernstein is thinking the path to growth is imminent. If that is the case, then now would be the opportune time to buy advertising stocks if your investment horizon is three to five years. However, I am not entirely sure if I am in total agreement with that statement yet because economic indicators have not pointed to clear signs of an economic rebound.

Those ad estimates by Bernstein could be wishful thinking on the part of the analysts who put those estimates together, hopeful that the economy rebounds. It is, however, supported by the firm, whose economists are estimating a 4% growth in worldwide GDP in 2010 and a further acceleration of 7% in 2011, from an 8% decline in 2009.

Looking further at their numbers, they expect online advertising to drive 26% of the advertising growth in 2010 and 28% in 2011. I think they are being conservative and my own estimates point to online contribution north of 40%. I do not have the other ad bucket estimates so I am not sure where the other approximately 70% of the advertising growth will come from, however, I would think outdoor advertising and cable would command the highest share, with radio advertising continuing to show negative growth.

Interestingly, paid search is projected to drive 10% of the growth in 2010 and 8.7% in 2011, and display (and Rich Media) driving 5.2% of the growth in 2010 and 5.7% in 2011. The balance of online advertising growth is due to new formats like IP Video and mobile advertising.

So what stocks should you buy if you believe Bernstein’s estimates? Clearly stocks like Google (GOOG) and Yahoo (YHOO) since they are levered to online advertising which is accounting for a significant part of the expected rebound. The ad agencies like WPP (WPPGY), Omnicom (OMC), and Interpublic (IPG) and the online ad networks like ValueClick (VCLK) would make sense as well. The outdoor stocks such as Clear Channel Outdoor (CCO) and Lamar Advertising (LAMR) are good bets. Those two stocks have surprisingly retreated more than I expected.

Comments

[Doug Poretz:]

I am the co-founder of a 100-person communciations firm based in DC and I have 40 years of experience in PR, advertising, and (more recently, of course) interactive. I will focus these comments on your comments about WPPGY, OMC, and IPG. I believe they all have inherent and very major flaws in their business models. Rather than reiterate those views here, if you are interested, I laid-out my thoughts here: tinyurl.com/dk8ked

Beyond the analysis at that link, I can tell what is happening simply because I am on the receiving end of emails and phone calls from people who are leaving the big agnecies. Many have been laid-off; many more are afraid (with good reason) for being laid-off in the near future; and many (especially the most talented) just want to get out of a big ship that will take a very long time to turn around. If this was a topical isolated and temporary phneomenon, it might be an opportunity for the big agencies to pare expenses and eliminate some deadwood, etc. The problem is that in this business when people go and client teams experience rapid turnover, clients become impatient, especially when their own budgets are under pressure and their bosses are yelling for new ideas and approaches.

In short: from someone inside the business ... I see absolutely no reason to think that the big agencies have a bright future in the short-term.

Mar 18 09:07 AM

[Steve Biren...:]

Keep in mind that advertising spending lags the economy into and out of recessions. That said, if it becomes apparent that ad spenidng will be positive in 2010 all ad related media stocks will rally including internet ad stocks like Google. But DI, NWSA, TWX, etc. also would have potential.

Mar 18 10:58 AM