Fairfax Media and News Corporation hit new market lows this morning as the media sector continued to bear some of the brunt of short selling after the ban on shorting non-financial stocks was lifted yesterday.

Fairfax opened at a new low of $1.265 this morning and at 11.30am was trading around $1.30, which was off 10 cents on yesterday’s close, or 7%. At this level, Fairfax was valued at less than $2 billion: its long term value was set at $2.496 billion.

News was also sold down sharply: it hit a low of $10.09, which was down more than 8%. It was trading at $10.27, off 72 cents, or 6.5% at 11.30 am. News was valued at $A8.776 billion which was considerably less than its long-term debt of $US13.744 billion.

On that basis News is entering even more fraught territory than Fairfax, although it has less room to move in its share price.

Everyone is gloomy on the prospects of the Australian media sector and it’s no wonder given the belting the sector has taken already, with the market pricing more damage on the way.

That seems to be the message coming from the UK and US markets where all media are now on broking and shorting hit lists. Here, Goldman Sachs JBWere, Citigroup and this week JP Morgan have issued gloomy assessments of the sector.

The firms have told clients mostly to to avoid the sector: their picks have generally been either News, Austar, Seek and Austereo. The most popular must-avoids: From the Ten Network and Fairfax Media.

JP Morgan’s comments this week were typical:

The Australian Media sector is facing the perfect storm over the next 12 months. Already confronted with some challenging and deep structural changes, most Australian Media companies are now facing the reality of a deep cyclical downturn. Compounding factors include a reasonably high financial leverage and the unlikelihood of value accretive industry consolidation.

Past cycles also suggest material further earnings and valuation downside from current levels. We have ‘rebased’ our earnings and valuation across the sector on the basis of a global recession translating into a 6% contraction in advertising spend in Australia in 2009.

Morgan warned that Fairfax was exposed to the current “cyclical downturn”, which “has all the signs of being a severe one”:

Newspapers as most exposed to structural erosion, radio and outdoor as slightly more insulated. In terms of stocks, we believe SEK, AUN and AEO are positively leveraged to structural shift and by contrast WAN, FXJ and TEN as most exposed.

But at least Fairfax wasn’t on the nose that much with JP Morgan: its least-preferred companies included West Australian Newspapers, Ten, Prime and Sky TV in New Zealand, which is part of the Murdoch empire.

Peter Fray

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