2005 Media Sector Outlook.pdf

Europe
Media

7 January 2005
Industry Strategy
Global Equity Research 2005 Media Sector Outlook
Top pick
Reuters (), GBP Buy
WPP Group (), GBP Buy
Money talks Mediaset (), EUR Buy

Relative performance European media
6/1/05
220
Paul Reynolds Mark Braley Patrick Kirby 215
(44) 20 754 76539 (44) 20 754 59904 (44) 20 754 73560
210
@ @ @
205
200
We see 10-15% upside in the sector in 05 on DCF, CROCI, PE/g ratios 195
and historical multiples analysis. A high FCF yield of % in 05E and the 190
prospect of sector FCF debt in 06E () underscore our 185
belief that stock picks must be conditioned by a view on the quality of 180
175
JFMAMJJASOND
managements' deployment of surplus cash. While 05 should not be a year D J STOXX MED IA E - PR IC E IN D EX
D J STOXX - PR IC E IN D EX
Sour c e: D ATASTR EAM
of strong cyclical upgrades, we are more bullish on the outlook for 06
Industry Focus when we expect the sector to move to discount through the year. Free debt (Euro m)
Deployment of cash: This is set to remain a key theme and differentiator 50,000
45,000
of stock performance in 05. We look to favour panies investing 40,000
wisely in new avenues of growth – although we find few examples 35,000
currently. We believe the default alternative use of cash should be to 30,000
25,000
return it to shareholders or retire excess debt. Finally, we expect 20,000
companies making dubious/expensive acquisitions/investments, or those 15,000
10,000
that remain under-geared to see downward ratings pressure. 5,000
Broadcasters score well on these criteria over professional publishers. 0
2001 2002 2003 2004E 2005E 2006E
Total Media FCF aggregate Total debt aggregate
pression/expansion: 2004 saw the professional publisher
multiples expand, the TV stocks de-rate, with agencies largely unchanged.
As such, sector multip