The year ahead for ... the city.(economic condition of media buying services)

Lorna Tilbian advises that the lessons from the last upturn provide a valuable guide for the media sector in recession.

In October 2007, we published Lessons from the Last Downturn which detailed the cyclical, structural, financial and valuation risks facing the media sector should the global economy slow down significantly, and fall into recession in the UK and US.

We viewed the professional/educational publishers as the safe haven in the sector, while we saw the greatest downside from free-to-air broadcasters. We thought large agencies could surprise with their resilience, while business-to-consumer would continue to suffer in terms of valuation due to structural as well as cyclical issues.

Although we have been taken aback by the sheer scale, severity and speed of the downturn, our analysis has proven broadly correct in the year or so since publication. We continue to view the near-term economic outlook as bleak, with steep interest-rate cuts and falling oil and commodity prices offset by high debt and negative wealth effects as house prices continue to correct and unemployment rises.

In this uncertain and recessionary environment, we are wary of the broadcasters, which have high advertising exposure and operational gearing, particularly as these factors are exacerbated by structural challenges and (still) high near-term multiples. By contrast, we are attracted by the breadth and resilience of revenue streams, variable cost bases and robust cash flow of the large agencies and professional/educational publishers, where multiples are well below those last reached in the depths of the 2001-03 downturn and even below those of the full-blown 1990-92 recession.

Elsewhere in the sector, we see long-term value in smaller agencies, B2B groups and some B2C publishers, though near-term share price movements remain difficult to predict with any degree of confidence as extreme volatility has become the norm. Finally, as the credit crunch eventually eases, we see scope for value in the sector to be unlocked through corporate activity as larger groups with strong balance sheets take advantage of the significant reduction in asset values and we also expect share prices to be supported, though on a selective basis, by increased dividends.

This month, we will be publishing Lessons from the Last Upturn where we will argue the case for the recovery. The stock market will begin to discount the pick-up a good year before we see any tangible signs of it Indeed, the bottom of the market will come at the time of unmitigated gloom and despair when management will speak only of perpetual decline. That will be capitulation. Historic patterns imply the current correction is worse than 1974 and indeed as severe as 1929. Investor behaviour and psychology suggest a near bottom as unbridled greed has given way to frozen fear.