This article explains why 2012 may be likely be a banner year for advertising, especially in the U.S., and examines three investment ideas to exploit that trend.
Reasons to be confident on U.S. advertising
2012 is likely to be a strong year for advertising, especially in the U.S.
- Global GDP growth is forecast to be 3.5% and advertising is generally pro-cyclical, doing better than average in years of economic expansion.
- The Olympics are a major advertising event and large enough to cause a significant change to the annual growth number.
- The 2012 U.S. elections, particularly with the advent of Super PACs enabling more electoral spending will cause a further uptick in advertising spending which could be as high as 3-4B according to the CEO of WPP Group.
Here are three stocks that might benefit from this trend.
Comcast now owns 51% of NBC, which owns the U.S. Olympic rights for London 2012. (For reference, GE owns the remainder, but their market cap is more than double that of Comcast, so NBC is a smaller relative to GE's business than Comcast's). NBC claims $900M of Olympic advertising committed so far, with 6 months to go until the event itself. Comcast's revenue is approximately $58B so this could account for 1.5% revenue growth on its own. Now of course profitability is a different question, since NBC paid $1.2B for the rights, but assuming strong continued execution the Olympics could make a significant contribution to Comcast this year.
Comcast's full year results earlier this year were strong, with solid subscriber growth, and 2012 looks promising in other ways too. For example, Comcast owns a stake in Universal movie studios and their release of The Bourne Legacy in August (the 4th in the Jason Bourne series) could gross over $200M based on the track record of it's predecessors. Comcast trades at 19x earnings with a 2.2% yield and has an aggressive stock buyback plan in place for the year, building on buybacks in 2012.
A more obvious way to play ad spend growth is simply to buy shares in an advertising agency. Of the large agencies Interpublic IPG appears cheapest on a P/E basis according to Google finance (see chart below).
All agencies such as WPP (WPPGY), Publicis and Omnicom (NYSE:OMC) offer upside to strength in advertising in 2012, but Interpublic may also benefit from P/E re-rating relative to peer companies. The main reason for IPG's discount appears to be an earnings miss of Q2 of last year.
Google should benefit in 2012 from two factors, firstly the trend of growth in spend as described above, but second the substitution from 'traditional' media to online advertising as viewers consume more content online and advertisers become more comfortable with the channel.
Google is currently trading at just under 21x earnings, and is growing revenues well into double digits, but Google did fall substantially when its most recent quarter.
|Company||P/E||Exposure to advertising as % of revenues (Approx.)||Specific driver|
|CMCSK||19x||11%||US Olympic rights|
|GOOG||21x||100%||Global advertising, switch to online|
2012 is likely to be a strong year for advertising, and gaining exposure to this trend within your portfolio is worth considering. IPG might be the most interesting idea given it has the most compelling valuation on a P/E basis.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IPG over the next 72 hours.