Online Winning Election Ad-Spend

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-Political ads up strongly
-Online focus for politicians
-Digital continues to grow ad share
 

By Eva Brocklehurst

Advertising momentum appears to be subdued but did grow in June, driven by increased political spending. Agency advertising spending grew 1.8% year on year in the quarter which compares with a 2% decline in May and 1% growth in April. The mainstay was political advertising, which has more than doubled year on year. Wonder why. Outside of election-related spending, soft advertising is expected to persist, probably through to September, or until after the federal election. Then, a pick-up is expected to compensate for the reduction in political campaigning. By some, but not all brokers.

JP Morgan has drawn on industry feedback to suggest the election will offer an advertising blip, as always, but thereafter subdued conditions will reign again through the rest of FY14. The broker has cut its ad-spend growth forecast for the period to 1.3% from 2.7%.

Meanwhile, what stands out for analysts is that print has failed to be a beneficiary of the increased political advertising. Politicians, it seems, are increasingly paying attention to courting voters either online or on TV and radio. Online advertising spending grew robustly, by 24%, and continues to offset large declines in print media as newspapers and magazines fell 22% and 25% respectively in June.

The digital share of political advertising spending reached a record high of 28%. While the largest share of advertising went to TV, 35.6%, digital procured the largest increase in terms of government dollars spent. Goldman Sachs thinks this is indicative of a trend of fragmentation in advertising, even on the political front. It remains to be seen whether fragmentation will lead to lower election ad spending this year against previous election years, given that digital advertising tends to be less expensive than other media, particularly TV. This notwithstanding, the trend has not stifled overall government advertising spending in the June quarter.

Free-To-Air TV advertising was the stand-out because there was a strong slate of sport and reality programming in June. Both FTA and pay TV also benefitted from the increased political ad spending. Total TV advertising spending grew 5.7% in the year to June. Pay TV ad share has doubled to 12% over the past six years but remains below its 20% share of commercial viewing. Radio advertising grew 8% in June while the outdoor sector was down 7%.

Retail, the largest advertising category, fell slightly (2.7%) in the June half. Entertainment also fell 6.6%. Automotive advertising has overtaken finance as the second largest category and grew 4.5%. Other categories which rose included travel, up 2.7%, pharmaceuticals, up 18.7% and media up 5.0%. Goldman Sachs has observed that gambling advertising growth was solid. Spending on gambling advertising on TV grew sharply over the last 12-18 months but the trend has now slowed. Goldman expects advertising market growth in 2013 of 0.7% and stronger but relatively subdued growth in 2014.

What does this industry statistical data indicate for certain stocks? UBS has cut regional newspaper growth estimates to down 10.2% for FY13, reflecting commentary emanating from Fairfax Media ((FXJ)) and APN News & Media ((APN)). Fairfax remains the only Buy recommendation the broker has in the media sector. The stock stands out given the strength of the balance sheet and potential for upside earnings surprise. UBS thinks Fairfax is suffering as the market underestimates its ability to meet cost cutting targets. In the online space the broker prefers REA Group ((REA)) and SEEK ((SEK)). Seek is underpinned by a continued migration to online business from print. REA is considered to have the best earnings growth in the sector despite trading on a relatively high FY14 price earnings multiple of 28 times.

 In this environment Credit Suisse likes Seven West Media ((SWM)) as a strong micro story in the traditional media sector and Ten Network ((TEN)) for its leverage to a recovery in ratings and FTA TV advertising. Carsales.com ((CRZ)) is also favoured as it has strong exposure to digital advertising which is maintaining strong momentum throughout the current cyclical downturn.

Goldman  has a preference for Carsales.com as well as SEEK. The broker's least preferred stocks are Fairfax, APN News & Media and Ten Network.

JP Morgan, who is expecting weak post-election spending, is Overweight Seven West and Prime Media ((PRT)) and Underweight Fairfax and Seek.
 

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