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Survey Finds Trouble Under the Hood

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NEW YORK CBS Corp. and News Corp. are more at risk than their peers for advertising weakness this year and early next year because of their higher exposure to auto and financial ads amid a sluggish economy, according to a new UBS analysis.

"Due to its lower advertising exposure to autos and financials and higher mix of more economically resilient advertising partners, we view 'buy'-rated Viacom as best positioned relative to peers," UBS analyst Michael Morris argued in the latest survey that attempts to gauge how the sluggish U.S. economy will affect media and entertainment giants.

Viacom management has argued that its fast-food and consumer staples marketing partners are less likely to cut back on ad budgets in a possible recession, making the firm more recession-resistant despite a higher revenue percentage coming from ads than at other conglomerates. In line with that projection, Morris predicts that Viacom's top 10 ad partners will show 5.6 percent revenue growth in 2008, compared to 1.7 percent for the top 10 media industry ad partners overall.

He argued that CBS, which reaps 70 percent of its revenue from advertising, is the most exposed among all media conglomerates to ad risks in a weak economy, followed by News Corp., Disney, Time Warner and Viacom.

However, CBS should be somewhat buttressed by its strong position in the political ad market. (The company has already reported a record first-quarter political ad haul in radio and TV.)

The economic ad effect is likely to be most pronounced in the automotive category.

Across the media space "autos represent a particularly high-risk business at 12 percent of total ad spend, with 0.6 percent consensus estimated revenue growth in 2008," Morris said, pointing out that News Corp. has four car advertisers among its top 10 marketing partners, CBS has three, and Disney and TW two each, while Viacom has none.

Morris noted that Viacom's top marketing partners also include film and entertainment companies, and he argued that this category would not suffer even in a recession.

"Entertainment advertising is resilient, as companies have already invested a lot of time and capital into the production of their theatrical releases and must market them to drive ticket sales and reach profitability on the films," he said.

The UBS report came out on the same day as the latest update to the monthly Conference Board confidence index, which signaled continued challenges to consumer sentiment in addition to the strains on advertisers that Morris analyzed. For May, the index showed confidence among U.S. consumers fall more than projected to the lowest level since 1992 amid the continuing housing slump and higher food and gas prices.