Analyst sees ad market retrenchment

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The U.S. advertising market is in the early stages of a slowdown and will be under much pressure through 2009, BMO Capital Markets analyst Lee Westerfield said in cutting his ad growth estimates.

That will likely continue to hurt media and entertainment stocks over the near term, he suggested.

"Analysis of historical cycles suggests that during the early months of a U.S. advertising slowdown, media multiples will be at risk of compressing about 15%-20%," Westerfield wrote in a report Friday, echoing recent comments from others on Wall Street (HR 11/28).

"An advertising cycle downturn now overshadows the media marketplace. The waning ad cycle is now in its early stage."

His analysis led him to the conclusion that "the ad cycle retrenchment will likely stretch through 2009."

For 2007, BMO now expects U.S. ad spending growth of only 2.6%, down from a previous 3.4% estimate. For 2008, Westerfield projects 3.6% growth, down from an earlier 4.3% estimate. And for 2009, he has an early growth forecast of 2.7%.

While 2008 spending will see boosts from the U.S. presidential elections and the Olympics, it will be hurt by the unwinding of what Westerfield called the "overinvestment among many financial service advertisers in recent years."

Here, the analyst drew a parallel to the dotcom bust of a few years ago, saying: "That theme rings eerily familiar to the 2000-2001 period."
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