Cable TV's One-Two Punch

12/22/2010 3:02 pm EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

As ad dollars flow online, popular cable networks that can drive traffic to related Web sites are cleaning up, writes Benjamin Shepherd in Personal Finance.

The popular TV show “Mad Men” has promoted a romanticized view of the advertising business. But over the past few years no amount of Don Draper’s charm would have won new business for any ad firm.

More recently, the economic recovery, however modest, has prompted companies to turn to advertising as a means of gaining market share in the US and abroad, welcome news for a number of businesses.

Online Ad Sales Clicking
PricewaterhouseCoopers estimates that spending on Internet ads will grow at an annual rate of 7.7% through 2013, while expenditures on product placement in video games will increase by an average of 13.85 each year. Spending on TV ads is expected to grow by about 1% annually, while newspaper advertising is expected to decline by roughly 4% annually, with much of that money flowing to digital and web media.

Thus far in 2010, spending on advertising has rebounded by almost 3%, and digital ad buys have eclipsed traditional print media purchases. Here are two of the top plays on this theme.

Scripps Networks Interactive (NYSE: SNI) boasts a stable of cable TV networks that includes HGTV, Food Network, Travel Channel, and DIY Network, all of which feature lifestyle programming.

TV is a big part of Scripps’ business model, but it’s not wedded to the boob tube. Companion websites for all of its networks are the foundation of its growing Internet presence, and the company also provides streaming video content for smartphones.

Although Scripps has benefited from higher affiliate fees as contracts with pay-television providers come up for renewal, significant increases in advertising sales continue to contribute meaningfully to overall revenue growth.

Demographics Feed Growth
Scripps has become popular with advertisers because its lifestyle programming tends to attract affluent viewers with high disposable incomes. Better yet, advertisers can reach consumers both through Scripps’ TV networks and high-traffic Web sites, a combination that enabled the company to grow third-quarter revenue by 34% from a year ago.

Scripps continues to aggressively leverage its content, recently inking a deal to distribute programming through AT&T’s (NYSE: T) high-speed U-verse network, which reaches 2.7 million subscribers. Deals with global satellite and cable TV service providers ensure that Scripps’ content is also viewable on every continent. Buy Scripps Networks Interactive up to 55. [Shares recently traded a bit below $53—Editor.]

Discovery Communications (Nasdaq: DISCA), which boasts 1.5 billion subscribers worldwide, posted strong third-quarter revenue growth of 11% after affiliate fees rose 9% and ad revenue jumped 16%. Advertising accounts for the majority of the company’s sales.

Voyages of Discovery
The Discovery Channel attracts plenty of advertising dollars, primarily because of its wide distribution—170 countries and counting—and its popularity among women and young adults, demographics coveted by advertisers. And there’s more to the company than its flagship channel; TLC and Animal Planet continue to grab a growing slice of primetime viewership.

Over the trailing 12 months Discovery’s revenue has jumped by $200 million, largely driven by higher ad sales. Operating margins have also widened, thanks to the firm’s relatively low production costs. These two factors should enable the company to grow earnings by at least 16% in 2011. Buy Discovery Communications up to 44. [Shares recently traded at $42.60—Editor.]

[Last month, Michael Brush wrote about the three ad agency stocks benefiting from the recovery in ad spending. One of them, Omnicom (NYSE: OMC) is also recommended by Shepherd—Editor.]

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