Ad Market Faces Uncertainty, but the Worst Might Be Behind Us

Shares of advertising and media conglomerates are near 52-week lows, and media and entertainment investors are becoming worried about the outlook for the industry heading into next year.

Goldman Sachs analyst Anthony Noto believes there will be a larger-than-expected slowdown in 2008 for many media and entertainment companies, writes Adweek.

Up to now, most projections for 2008 show a nice bump in ad spending, thanks to the Beijing Olympics and the presidential elections. Still, a possible recession and increasing oil prices could lead marketers to cut some spending, particularly after the weak housing market has already hurt real estate advertising.

Already, ZenithOptimedia has downgraded its 2007 forecast for U.S. ad spend gains from 3.3 percent to 2.5 percent. The company originally predicted a 4.1 percent increase for 2007; it may sink even lower next week, when CEO Steve King updates his estimates for 2007 during the annual UBS Global Media & Communications Conference.

Bob Coen, director of forecasting at media agency Universal McCann, believes that U.S. ad spending likely would only rise 3.1 percent this year, down from his original forecast of 4.8 percent.

Coen said next year’s U.S. ad growth should be more solid, in his first forecast for 2008. He predicted it would be up 5 percent; market watchers are waiting to see how he revises his estimate next week.

Most analysts agree that growth overseas will continue to exceed the U.S., as it has done since 2003.

Meanwhile, Bank of America has lowered its investment rating on The New York Times shares to Sell from Neutral and, though problems in the newspaper sector are generally of limited value when trying to decipher wider market or economic trends, the downgrading may offer insight into a broader question - that of how retail spending influences the U.S. economy, Barron’s writes.

Luxury advertisements represent 28 percent of the Times’ national advertising revenue, and if the luxury category is beginning to see slippage due to the same concerns facing department stores and discounters - that is, falling home prices, a volatile stock market and high fuel costs - the economy is “in real trouble,” according to the article.

BofA’s analyst, Joe Arns, points out that luxury advertising categories tend to remain stronger for a longer period of time during times of slowdown, but they are not recession-proof: “During the 1990-91 and 2001 recessions, The New York Times’ national ad volume dropped 26 percent and 19 percent, respectively. Recent strength in these categories might have given investors a false sense of security heading into a more uncertain economic environment in early 2008,” he is quoted as saying.

Still, today Federal Reserve Vice Chairman Donald Kohn reinforced expectations for another interest rate cut when the Fed meets Dec. 11, which led to the biggest two-day stock market rally in four years, led by financial shares, reports Bloomberg.

“Kohn’s comments just add to a perception that the Fed is embarking on a sustained path of easing,” said Michael Metz, chief investment strategist at Oppenheimer Holdings Inc. “There’s also huge relief that the worst of the financial crisis may be behind us.” Metz said in May that U.S. stocks would decline by year-end.