Chinese Companies Lead Advertising Investment Options

Google (GOOG) and Baidu's (BIDU) recent strong results show that the advertising sector is healthy despite tough recessionary times. The resiliency of companies needing to spend to support their brands and businesses is as strong as ever. With their results I thought it would be helpful to complete a sector analysis of all companies classified as Advertising Agencies. Technically, many of these stocks are classified as internet information providers but they achieve a large percentage of their revenues from advertising. The table below summarizes companies with a market cap greater than 1.0B with their chief means of revenue generation being delivered by advertising or search advertising revenue.

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(1) Sohu achieved almost 50% of its revenue in Q1 2008 from online games

The first column sorts companies by market cap. No surprise here with Google and Yahoo (YHOO) leading the way. WPP Group (WPPGY), Omnicom (OMC) and Interpublic (IPG) are more traditional ad agencies with large market caps but slowing growth. When you look at expected sales growth for 2008 you can definitely separate the traditional ad agencies vs. the new on line media companies. Baidu leads with an expected sales growth of +88%, but Bankrate (RATE), with +77%, and Focus Media (FMCN), with +75%, are close behind. Sohu (SOHU) recently reported very impressive numbers but a lot of their sales growth is being driven by their entry into the online game market. Google, the 800 pound gorilla, is still delivering a very impressive +38% sales growth on top of a huge base. Yahoo continues to underperform, hence the takeover offer by Microsoft (MSFT).

The next columns measure Forward PE and PEG (Price to Earning Growth). Here were trying to spot some value so we don't overpay for the fast growing companies. With PEGs below 1.0 , Focus Media at .55 stands out as dirt cheap. Google, Bankrate and Sohu also look like good values.

Lastly, we look at net margin. We want to make sure the strong sales have the ability to deliver strong profits. Again you can see the new online media results vs. the traditional ad agencies. All the new media companies are delivering net margins above 15% while the traditional ad agencies have net margins less than 10%. While it may not be fair to include traditional ad agencies with the newer online companies, I thought it would be helpful to benchmark valuations. It is also the way the industry is classified, again focusing on delivering advertising to the end consumer.

So what does this all mean? Google continues to lead and is still a great value. The most promising high growth stocks in this sector are Baidu, Focus Media and Sohu. FMCN and SOHU also provide decent value at these levels. BIDU used to be a reasonable value, but its stock price has climbed +52% in the last 4 weeks. The fact that all 3 are Chinese companies may have something to do with their more attractive valuations, but it's also pretty clear that Chinese companies have more growth potential. The Chinese are just beginning to aggressively advertise and the Beijing Olympics should be a strong catalyst to drive advertising growth for many years.

Lastly, I wouldn't rule out Bankrate as a good investment if they can maintain their sales growth rate. At .92 PEG, it is still attractively valued and growing in a tough mortgage and housing environment.

Disclosure: Author is long GOOG, BIDU, FMCN and RATE and recently bought a long position in SOHU.

Comments

[Itsjustal:]

You should take a look at a NASDAQ listed Chinese media company named Xinhua Finance Media Ltd. (XFML). Billionaire Ron Burkle recently took a very large position in it. You may recall that he took a run at Dow Jones recently so that he could secure control of the Wall Street Journal. XFML operates in virtually all media advertising sectors in China. It is poised to be the defining source for business and economic information in China. I am giving a very abridged summary here, but it is worth everyone's time to research it. It has a single digit P/E ratio today.

2008 Apr 29 09:19 AM

[eid:]

I agree just using FMCN is a very narrow outlokk and you need to look at XFML and VISN to include a broader aspect to the article.

2008 Apr 29 04:14 PM

[investorslive:]

SOHU coming up on a short soon? Made my scan

www.investorslive.com/.../

2008 Apr 29 11:19 PM

[borisb:]

why would the Olympics drive more growth in 2009 and beyond? also would you consider doing a report on McDonald's spinoff Chipotles - CMG & CMGB.

2008 Jun 28 12:36 PM