Fears that a possible US recession will sap advertising spending have soured investors on the media industry, but some entertainment companies just might be more resilient than Wall Street thinks.
For starters, more cost-conscious consumers could end up at the cinema even if they spend less elsewhere in the event of a recession. After all, this summer's films are estimated to have raked in a record $4.18 billion, and that bodes well for DVD sales for the upcoming holiday shopping season.
The weak dollar could also help, particularly for Hollywood studios that earn a lot of foreign box office revenue.
"Investors have forgotten that this industry is a big beneficiary of the weak dollar," said Gamco Investors associate portfolio manager Larry Haverty. A movie ticket in London costs the equivalent of $22, compared with $11 in New York, for example.
Media watcher said companies with significant international exposure, such as News Corp and Walt Disney Co, are good stock picks.
"For Disney, obviously, visibility on theme parks is key in terms of traffic," said Standard & Poor's media analyst Tuna Amobi, adding that visitors to Disney theme parks have been holding up, though the September quarter will be critical.
Analysts cite CBS Corp, which is dependent on the US television advertising market, and newspaper publishers like The New York Times Co and McClatchy Co as among those that would be most hurt by a steep US economic slump as marketers trim ad budgets.
"As the economy weakens, ad spending will weaken. The Internet is taking a bigger share from broadcasters and newspapers," said Ed Maraccini, a portfolio manager at Johnson Asset Management.
TNS Media Intelligence forecast only 1.7 percent growth in US advertising spending in 2007, compared to 4.1 percent growth in 2006.
"The first half is not a happy picture," TNS director of research, Jon Swallen, said, pointing to a 0.3 percent fall in US ad spending in that period. It was the first time ad spending has shrunk for two straight quarters since 2001.
"A lot of the fundamental circumstances that have contributed to the first half are still in place. It'll make for a challenging second half of the year," Swallen said.
Amid the pessimism, the S&P Media Index has fallen about 8 percent over the past two months, underperforming a 4 percent decline in the S&P 500.
Within media, Disney has lost 2 percent, while News Corp fell 5 percent and CBS fell nearly 11 percent. McClatchy and New York Times dropped 23 percent and 17 percent respectively.