January 24, 2012
The 2012 presidential election could be one of the most expensive in history, starting with what is expected to be a drawn-out primary season. For candidates and voters, that means an awful lot of advertising yet to come, starting with Florida, an expensive advertising market because of its large population.
Between primary races, national and state elections, political advertising is expected to reach $4.9 billion in 2012, according to Wells Fargo, a 17 percent increase from then-record spending in 2008. That should benefit investors of all political stripes. Analysts said local television, radio and billboard companies will see profits jump as voters decide on the presidency, 11 governorships, 33 Senate seats, and all 435 seats in the House or Representatives. So, how to play the ad glut this election year?
EXPOSURE TO BATTLEGROUND MARKETS
Media companies with a heavy presence in states with early primaries and hotly-contested races could be smart plays throughout 2012, said Marci Ryvicker, an analyst at Wells Fargo. "From an investment standpoint, the focus is less on the overall political number and more on where the bulk of the political dollars will go and who will reap the greatest benefits," Ryvicker wrote in a recent note to clients.
Television advertising accounts for about 60 percent of all political spending. That makes LIN TV Corp and Sinclair Broadcast Group well positioned for the 2012 elections, she said. Both companies, which own local television stations, make about 40 percent of their revenue from states with contested elections, Ryvicker said. Sinclair Broadcast Group, for instance, gets about 25 percent of its revenue from states, like Florida, that will hold their primary elections before March and will be swing states come November.
Lin TV, which owns local Fox and NBC stations in competitive markets like Florida, Ohio and Virginia, has the added benefit of looking cheap. The stock is down 5 percent this year and trades at a price to earnings ratio of 8.4. The broad Standard & Poor's 500 index trades at a P/E of about 13. Sinclair Broadcasting trades at a P/E of 12, but offers a dividend of 3.7 percent. The company's shares are up 14 percent so far this year, but analysts remain bullish. Douglas Arthur, an analyst at Evercore Partners, has a price target of $13.50 for the company, whose shares currently trade for nearly a dollar less.
The radio market gets about a tenth as much ad spending as television during election years. With a smaller base, the boost from political spending can have an impact on a company's bottom line, Ryvicker said. She pointed to Saga Communications and Entercom Communications as two companies which receive nearly one-third of their revenue from contested states. Saga Communications trades at a P/E of 12.4. It is up 46 percent over the last year. Entercom Communications, meanwhile, trades at a P/E of 4 and has fallen 21 percent over the last year as revenue fell while costs increased. That should change as ad season heats up. The record-breaking political spending could also benefit bondholders. High-yielding companies Barrington, Fisher and Lin TV each face significant debt payments in 2013, according to Moody's Investor Service. If these companies use the revenues from political spending to pay down debts, they "could begin considered debt-financed acquisitions, dividend increases or meaningful share repurchases," wrote Carl Salas, an analyst at Moody's, in a note to clients.
The broadest form of advertising is billboards. David Joyce, a media analyst at Miller Tabak + Co., recently upgraded his rating for Clear Channel Outdoor Holdings to a buy, in part because of the spillover effect of political spending. "Ad budgets could be squeezed out of radio and TV due to political demand and could come to outdoor," he wrote.
The company, which owns nearly 200,000 outdoor displays in 49 states, is down 7 percent over the last year after the company missed Wall Street estimates. Joyce has a price target of $14 for the company, a 10 percent jump from its current price. Along with the revenue gain from political spending, Joyce said there is a likelihood of increased buybacks and speculation that the company may be taken private. Lamar is another option. The company has an estimated 160,000 high-quality digital billboards that could capture local political spending. "They are one of the most aggressive companies" in the billboard space, said Jim Boyle, a managing director at SQAD, which forecasts media spending.
Shares of Lamar are up 7 percent so far in 2012, but remain 29 percent below the 52-week high they reached last February.
The PowersShares Dynamic Media ETF (PBS), which charges 63 cents per every $100 invested, captures a broad range of media, many of which will benefit from super-charged political ad spending. The fund is top-heavy with big media companies, with large positions in Viacom, News Corp and Comcast. And CBS, its top holding, is among the best positioned among them to gain from political spending because of their mix of television and radio properties in early primary states, noted Ryvicker. The fund is down 4 percent this year, in large part because of a 22 percent drop in Marchex, a marketing company that makes up about 3 percent of the fund's portfolio.