Advertising

In case you haven't been paying attention, advertising revenues went south with the stock market even before the horrific events of September 11. Since that fateful day, however, things have taken a turn for the worse. Many executives were already describing this as the worst advertising recession on record; the terrorist attacks clouded the future of the industry even more. In the week after the attack, US television firms alone lost more than $400 million in revenue when commercials were suspended in order to provide continuous news coverage. But that was just the tip of the advertising losses. With airplanes grounded and business travel, tours, conventions, and hotel reservations either postponed or canceled, advertising expenditures suffered a deep and direct hit (Figure 1).

Figure 1: S&P 500, AMEX Computer Technology Index, and Dow Jones Industry Index for Advertising. The outlook for the advertising sector was gloomy even before September 11.

SPENDING AND PROFIT

Advertising spending is the Siamese twin of corporate profits. Wherever one goes, the other follows, and corporate profits began running out well before September 11. When the corporate going gets tough, advertising spending feels the pain first. A year ago, before the dotcom and technology sectors exploded, many of these companies were throwing money at the big advertising and media firms. Extraordinary times equal extraordinary spending; it was an era of paying top dollar for the top spot.

Nor was the partying limited to the United States. According to the experts, many overseas markets enjoyed a similar spending spree. With the downturn in the economy, however, tens of thousands of advertising jobs got vaporized. Two of the biggest advertising groups in the world — one in France, the other in the United Kingdom — recently warned about vanishing profits.

A recent profits warning from the Dutch media group, VNU, pretty much tells the tale; trading on the Amsterdam exchange at 27 euros (around $25), the company warning cited the slowdown in advertising at many of its US publications such as Adweek, Hollywood Reporter, and Billboard, the music business weekly. Advertising income from its US operations is expected to decline more than 30% in the second half of the year, down from a previously forecast drop of 25%. Advertising revenue from its European operations, VNU noted, would also take a hit, declining by 25%. That figure compares sharply with an earlier projection of the 16-17% shortfall the company anticipated before the terrorist attacks.

To make matters worse — as if they could get worse — information technology (IT) spending has been relegated to back-burner status since September 11. Previously, many had believed IT spending bottomed out in late May. Given time, some of the gloom may prove to have been overdone.

Still, advertising spending is a distant cousin to purchasing hardware. Take the example of Sun Microsystems. Before the terrorist attack, Sun was one of the few technology companies that had not announced cutbacks. Following September 11, however, enterprise hardware orders dried up and Sun now plans to lay off nearly 10% of its workforce.

CHAOS = OPPORTUNITY

The primary stock market trend was bearish before the terrorist attacks; ditto for market psychology. So with all this horrible news, why are we bothering to dredge up more? Largely because chaos creates opportunity. Save for those who believe the world is coming to an end, savvy investors may soon be snooping around the market for quality, money-making investments. That snooping could entail both the equity and the debt markets for these sectors. After all, everyone from the big Wall Street gurus to 401(k) holders is looking for an economic turnaround. It would be highly unlikely to get an economic rebound without some of the good cheer cascading into advertising and media.

At the very least, buying advertising-related stocks would offset an investor's portfolio of more defensive equities such as health care and consumer nondurables. Consider it an inexpensive hedge.

Ron L. Ellison is a registered investment advisor and financial planner with RLE & Associates, Newport Beach, CA 92660. He can be reached at 949 261-1740, 877 455-9681, or RLEasset@aol.com.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.

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