Wachovia: Ad environment weaker than expected


Marci Ryvicker, VP/Equity Research Wachovia Capital Markets, reports the ad environment is now weaker than was expected and they have lowered their forecasts:  "The resilience of consumer confidence and spending may not be sustainable given 1) the persistent price increases of everyday necessities (i.e. gas, dairy); 2) the fear of interest rate hikes to curb inflation; and 3) the depressed real estate market.  In fact, the real estate market is wreaking havoc in many areas of the country, specifically the West and Southeast, which could adversely affect ad dollars.  As a result, we reduced our '07 advertising forecast by 200 basis points (bps), to 2.3% from 4.3%.
Given its declines in circulation/audience levels, its lack of efficient and effective audience measurement systems and its ''un-sexy'' appeal, traditional media is going to bear the brunt of any reduction in ad spending. 

Advertisers are more inclined to shift money toward media that is considered more sexy, measurable, and efficient.  While the online, outdoor, and Hispanic media segments may feel some softness, we don't expect this to occur anywhere near the magnitude of traditional media.

Following a very weak May, we expect modest improvement for the second half of 2007, though still anticipate mid-single-digit declines, as the weakness related to real estate classifieds is having a ripple effect into related categories within local advertising. We have lowered our '07 newspaper ad estimate to -4.8% from -3.6%.

Marketers continue to move budgets to more targeted media, and Internet remains the biggest beneficiary, a trend likely to continue for several years. For 2007, we forecast a 22% increase, reaching 20.6B.

We did not change our 9% growth estimate for the outdoor sector, given the substantial advertiser interest in digital billboards, which are still a hot commodity.  Even traditional billboards are faring well, given their lack of technological threats and low cost relative to other media.

Early last week, the RAB reported a 1% decline in May, which was below expectations.  Industry sources suggest that June may have done the same, prompting us to reduce our Q2 industry estimate by another 100bps, to 0% from 1%. Our full year estimate remains flat, but we believe there is downside risk given the tough political comps in the second half. We also reduced our company-specific radio estimates.

Although the upfront market was stronger than expected (exhibiting 2% growth versus the flat-to-slightly down expectation) and the early primaries should contribute to above-average political spending in the second half of 2007, auto (which makes up 25% of industry rev.) softness persists.  Given the shaky economic environment and no auto upturn in sight, we reduced our industry estimate by 50bps, to -2.0% from -1.5%."