The recent market turmoil seems to be spreading from sector to sector much like a virus. The first victim was RAMS, which forgot to secure long-term debt and was ousted by the credit crunch a few weeks after listing. The next wave of victims were the overly-leveraged, too-cute financial engineers like Centro, Allco and MFS which were market darlings during the boom, but exposed as debt funded buffoons when the music stopped.

Last month, retailers were struck by the spreading ailment. High-fliers like JB Hi Fi (down 35 percent), David Jones (down 28 percent) and Harvey Norman (down 36 percent) have all fallen substantially from their peaks. This week, it was the usually “defensive” banks turn, after ANZ and CBA announced increased provisions for bad debts. Most of the large Australian banks are trading around 25 percent off their highs and many are on almost single-digit earnings multiples.

Strangely though, one industrial sector that has remained largely immune from the carnage has been media companies (resources have also performed reasonably well). Courtesy of a proposed Lachlan Murdoch/James Packer takeover bid, Consolidated Media is trading on a PE of 26. The well-performing Seven Network is trading on a forward PE of around 19, while acquisitive Fairfax is trading on an earnings ratio of almost 16 times 2007 profits. The highly indebted Macquarie Media, which has been punished by the market in recent times and is trading on the lower forward earnings ratio of 10, but that is assuming FY2008 earnings double. US-domiciled News Corp, has had a decade of underperformance but is still afforded an earnings multiple of 15 – despite its share price being lower now than in 2004.

Media companies are not renowned defensive stocks. As they earn money from advertising, media businesses tend to struggle during economic downturns. This was most evident in the late 1980s when Bond Media (then owner of Channel 9 and WA Newspapers) was unable to pay debt owed on preference shares and was bought back by Kerry Packer. Similarly, Christopher Skase’s Quintex (owner of Channel 7) collapsed like a house of cards in 1990. Channel 10 (which was owned at the time by property developer Frank Lowy, in one of his least successful ventures) was sold in 1989 to a consortium which lasted about a year before being placed into receivership by its bankers who ultimately wore a $240 million write-down.

Today, media companies are priced as though they are about to enter a period of profit growth, when in actual fact, advertising revenues look like being squeezed in the years to come, with profitability likely to worsen. But don’t expect to read all about it.

Peter Fray

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