Many economists and investors expect the economy to slow down as the Federal Reserve continues to raise interest rates.
The would likely spark a slowdown in advertising.
Wells Fargo analysts looked at how such a decline would affect about 20 stocks with meaningful ad revenues among media/entertainment companies, ad agencies, TV broadcasters, cable TV operators and outdoor advertisers.
A 10% decline from the analysts’ ad revenue estimates for 2022-24 could lead to “9% to 10% earnings downside risk at the most ad-heavy names” in Wells Fargo’s coverage, the analysts said.
That includes:
· Omnicom Group (OMC), an advertising/marketing company;
· Clear Channel Outdoor (CCO), an outdoor advertising company;
· iHeartMedia (IHRTQ) , a radio station owner;
· Interpublic (IPG), an advertising/marketing company; and
· Audacy (AUD) , a radio station owner.
For video streaming platform Roku (ROKU), earnings before interest, taxes, depreciation and amortization could drop 45%, thanks in part to its high operating expenses this year, the analysts said.
They also listed their favorite names for this “tricky time.”
They noted that these are tactical recommendations and may not align with their longer-term investment theses.
In any case, the favorites benefit from lower ad exposure and solid free cash flow and balance sheets, the analysts said. The companies include:
· Sirius XM (SIRI), the radio broadcaster;
· World Wrestling Entertainment (WWE), the wrestling event operator;
· Imax (IMAX), the theater/film company; and
· Nexstar Media (NXST), the country’s largest local TV station owner.
Morningstar’s Take on Sirius
Morningstar analyst Neil Macker likes the company, assigning it a narrow moat.
He puts fair value for the stock at $8.25, compared to a recent quote of $6.34.
“Sirius XM posted a slightly stronger-than-expected start to a challenging 2022, as revenue exceeded and EBITDA met FactSet consensus expectations,” he wrote in a commentary.
“The SiriusXM service lost 25,000 self-pay customers in the quarter, in line with the weak annual guidance of only 500,000 net additions, which management reiterated.”
The loss stemmed from limited auto inventory, Macker said.
“Management continues to expect that most of the net adds for the year will occur in the second half and has seen some improvement in the paid subscriber funnel.”
Morningstar’s Take on Imax
Morningstar analyst Neil Macker is bullish on the company, assigning it a narrow moat.
He puts fair value for the stock at $22, compared to a recent quote of $15.96.
“Imax posted a decent start to 2022, as the first-quarter box office grew 57% year over year, but remained well behind the first quarter of 2019,” Macker wrote in a commentary.
“The box office in China actually declined versus 2020.... Additionally, the war in Ukraine has shut down the firm’s Russian screens, which account for 3% of Imax box office grosses on average.”
"We still believe that larger movie slates and more blockbusters should help Imax to return closer to 2019 box office grosses in 2022, excluding China,” Macker said.
