As the Republican primaries heat up, it is pretty easy to pick out the winners — at least as far as media stocks are concerned.
With the vast majority of campaign dollars flowing through local TV, the entertainment conglomerates with the most to gain are CBS, which generates the largest share of its revenues from local broadcast, according to analyst Anthony DiClemente of Barclays Capital, and News Corp., which owns even more TV stations than CBS and controls Fox News Channel as well.
Though election spending is expected to be at record levels, reaching about $2.6 billion, it accounts for only 1.6% of the U.S. ad market, DiClemente says. On the other hand, in 2012 it will account for 25% of ad growth in 2012.
“We also believe that the influx of political dollars in 2012 will have a ‘crowding out’ effect, pushing advertisers into other spots and potentially other media, which should boost advertising pricing (CPMs),” he says in a recent research note. “In the local TV ad market, advertisers often buy pre-emptable spots, which are sold at a discounted rate with the understanding that another advertiser could claim the spot by offering to pay a higher price. This occurred in South Carolina during the NFL divisional playoffs, as super PACs offered significant premiums (sometimes double the normal rate) to bump existing advertisers into later slots.”
Oddly, according to DiClemente, “stocks exposed to political advertising actually perform better in non-election years. We believe investors tend to look through the transitory benefit of political and focus more on underlying core fundamentals.”
Nevertheless, the elections will send a lot of dollars towards CBS and News Corp.
DiClemente believes CBS has already reached CEO Les Moonves’ goal of generating $200 million in political dollars. DiClemente assumes CBS will be the beneficiary of $230 million in campaign spending, and that its local broadcast segment will be up 9.4% in revenues. Without political, local broadcast revenues would be flat year over year, he says.
News Corp.’s local stations will also benefit from political, DiClemente says. “We have TV station growth accelerating over the next couple of quarters as we approach the elections in November and as the year over year comparisons become easier,” he says. At the same time, News Corp. will be doing a round of carriage agreements for Fox News Channel covering more than half of its subscribers by summer 2012. “We have modeled affiliate fee growth of 15.0% year over year in fiscal 2013 (News Corp.’s fiscal years ends in June), which could prove conservative given that we expect News Corp. to have considerable leverage in its carriage negotiations for the cable news channel in an election year,” he says.