The Coming Boost to the Media Sector

 | Oct 19, 2011 | 8:45 AM EDT  | Comments
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Stock quotes in this article:

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ipg

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dgit

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If you are unfamiliar with the quadrennial effect, you need to learn about it soon, because it will make itself felt. The effect refers to the boost in global advertising that comes every four years from three quadrennial events: the summer Olympic Games, the European football championship and the U.S. presidential election.

ZenithOptimedia estimates that the quadrennial effect will goose global advertising expenditures by $6.2 billion. You don't have to be a mad man (pun intended) to appreciate the boost the effect will create in 2012 for those who provide advertising services.

I have identified four companies that are well positioned to benefit from the quadrennial effect.

Two are recommended by my Peter Lynch-based guru strategy, and two by the strategy I created from the writings of Joel Greenblatt. I take the descriptions of strategies used by highly successful Wall Street investors and computerize them. This allows me to screen thousands of stocks instantly, to see which meet the criteria used by these investors. By the way, if you would like to talk about this approach with me, I will be at Chicago's Money Show this week. Stop by at one of my speeches and say hello, or email me to meet.

The most significant -- and famous -- variable used by the Lynch strategy is the P/E/G ratio, which is the price-to-earnings ratio relative to growth. It lets the investor know how much a company's growth is costing him. A P/E/G of 1.0 means that you are paying $1 for every percentage point of growth. Lynch has specified in his writings that the most an investor should pay for each percentage point of growth is $1, so an acceptable P/E/G is always 1.0 or less. And generally, the lower the P/E/G, the better. In addition to using the P/E/G, the strategy considers such other variables as EPS growth rate and the debt-to-equity ratio.

The Greenblatt strategy takes another approach, using just two variables. One is the earnings yield, which is calculated by dividing a company's earnings before interest and taxes by its enterprise value, which includes not only the price of the company's shares but also the amount of debt it uses to generate earnings. The stock is then ranked on the basis of this criterion among all the stocks in our database.

The second criterion looks at the return on total capital, which examines how well a firm uses the capital it employs. Greenblatt calculates return on total capital by dividing a firm's earnings before interest and taxes (which is used instead of regular earnings so that debt payments and taxes don't obscure how well the firm's actual operating business is doing) by its tangible capital employed, which is equal to net working capital plus net fixed assets. As with earnings yield, the stock is ranked on the basis of return of total capital. The final step in the strategy's analysis is to combine the two rankings to create a final ranking.

The two advertising-oriented companies that pass muster with the Lynch strategy are ValueClick (VCLK) and Interpublic Group (IPG). ValueClick is a major integrated online marketing company that provides data, technology and services to online advertisers and publishers. Interpublic is a global provider of advertising and marketing services. ValueClick's P/E/G is 0.67, while Interpublic's yield-adjusted P/E/G is 0.73, both well within the parameters set by the strategy.

DG Fastchannel (DGIT) and Valassis (VCI) get high grades from the Greenblatt strategy. DG Fastchannel is a digital advertising delivery network whose services include production, distribution and research. Valassis provides media and marketing services, including its RedPlum newspaper inserts. DG's earnings yield is ranked 89, its return on total capital is ranked 118, and its final ranking a very good 22. Valassis' earnings yield is ranked 118, and its return on total capital is ranked 80, providing a final ranking of 20, which of course is excellent.

Next year promises to be a good one for advertising because of the quadrennial effect, and these companies are in a good position to benefit. 

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