Mr Media Investor is a keen observer of human behaviour.
Over the past few months, he has been treated to a couple of fine examples of the kind of herd behaviour that often grips the stockmarket. Both have occurred in the media sector, but have been diametrically opposed.
Recently, the stockmarket valuation of radio companies fell about 25%. The immediate catalyst appears to have been the realisation by investors of a softening in the UK consumer advertising market, triggered by first quarter 2005 results announcements and the associated profit warnings.
Mr Media Investor had been concerned about UK consumer advertising since autumn 2004, when it became obvious that a significant slow-down was taking place in the housing market.
For any investor who had been around in the early 1990s, this should have set alarm bells ringing. The links between the housing market, consumer spending and the advertising market, while not entirely predictive, are reasonably well established. Evidence of a housing market slow-down strengthened toward the end of 2004 and in the first quarter of 2005, but it was not until its impact on reported trading that it was picked up by the market.
The sudden change in sentiment by the market toward the radio sector has also highlighted risks that had previously either been ignored or heavily discounted. Analyst reports increasingly refer to the threat that commercial radio faces from the BBC and from the audience fragmentation, that will inevitably gather pace as DAB radio, satellite radio and internet radio all attract listeners away from traditional analogue offerings.
A factor that had been supporting radio-sector valuations was the anticipation of rapid consolidation in the aftermath of the Communications Act, possibly led by a new US entrant. However, it is now clear that neither Clear Channel nor Viacom are likely to want to enter the UK radio market. While these issues have all been around for a long time, it is only now, as the industry experiences a short-term advertising setback, that they are being reflected in valuations.
Mr Media Investor couldn't help thinking that this sudden switch in attitude from bullish to bearish had probably been overdone. However, for as long as the news flow in the radio sector continued to disappoint against expectations, there was still the risk of further downturn. He would keep close to his contacts in the advertising industry in the hope of spotting the early signs of impending improvement.
The generally pessimistic air surrounding the radio industry is in stark contrast to the euphoria surrounding the independent TV production industry. In the past few months, about half a dozen small, independent TV production companies have floated on the Alternative Investment Market aim at what appear to be extraordinarily full valuations.
The story being spun in the prospectuses is that the regulated new terms of trade between producers and broadcasters, as set out in the Communications Act, would transform a previously very unattractive industry into a very attractive one in a very short period of time.
Mr Media Investor, failing to understand why this would be the case, had asked around his contacts in the TV industry for an explanation. To date, he has not found a satisfactory one.
Furthermore, he had seen this phenomenon on the AIM several times before – it is also happening with oil exploration companies – and it always ends in tears. Mr Media Investor picked up the phone to his researcher. He would try and work out how best to adopt a short position on the TV production sub-sector.
Nick Martin is director of media investment at HGCapital
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