Summary:

City analyst Bernstein has cautioned investors to steer clear of public European media companies – citing exposure to the continent’s econom…

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photo: Flickr / Robert S. Donovan

City analyst Bernstein has cautioned investors to steer clear of public European media companies – citing exposure to the continent’s economic condition, over-spending and insufficient resources compared with U.S. digital rivals.

Bernstein’s note is scathing and all gloomy…

“After spiking over a decade ago, at a time when investors associated (mistakenly, as it turns out) traditional media companies with new media, the premia of stocks in European Media have steadily de-rated.

Valuations are still overly optimistic, as they do not reflect either the near term cyclical exposure to the European economy nor the structural threats, which are looming closer.”

Economic worry

Government deleveraging may disproportionately affect the publishers: we estimate that governments account for 52% of revenues at Pearson (NYSE: PSO) and 30% of revenues at Reed Elsevier (NYSE: RUK). Almost half of the companies in our coverage have virtually no revenue exposure to emerging markets.

“Traditional media companies have relatively few ways to protect themselves from the coming onslaught.”

Inferior business models

“Many of these companies are saddled with inferior business models. TV and consumer print companies are increasingly competing with companies that – by operating online – have a huge amount of additional consumer information available.

“Simply put, Google (NSDQ: GOOG), Facebook, Apple (NSDQ: AAPL) and/or Amazon (NSDQ: AMZN) have a huge amount of information on consumer interests, tastes and behaviour, NewsCorp has – through Pay TV – an address and a credit card number, and ITV (LSE: ITV) does not even know individuals exist (except statistically). The mega-new-competitors have a size (and funding) that dwarfs the capacity of traditional European media companies.”

Misspending

“We are somewhat puzzled by the relative comfort that most management teams exhibit and by the continued profligacy with capital. We are somewhat surprised that most management teams seem to count on a return to a stronger economy under the expectation that everything will be fine.

“Only two management teams (Pearson and ITV) are explicitly arguing that their companies need to change substantially how they operate to reflect the new realities of a likely protracted poor economy and technology changes, and only one (Pearson) seems to have a coherent strategy in place, as well as the assets and the capital required to execute the strategy.”

But is Bernstein worrying too much?

  • In its trajectory, it imagines scenarios like “Apple acquiring the TV rights of a major European football league”, despite Apple showing signs only of wanting to provide licensed, not owned, access to content.
  • ITV is already taking steps to discover more data about its users with which to target advertising.

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