2 Stocks That Have Survived the Demise of Traditional Media Advertising

Source: Central European Media Enterprises.

Recent research by Kantar Media indicated that traditional media advertising is losing market share to new media advertising in the U.S. While media spending for Internet display advertising grew by a 7.2% CAGR from 2008 to 2013, advertising demand for traditional media channels has stagnated. For example, media spending for newspapers and network television has declined by 7% and 0.3%, respectively.

However, it isn't doom and gloom for all traditional media companies. Central European Media Enterprises (NASDAQ: CETV  ) and Lamar Advertising (NASDAQ: LAMR  ) are notable exceptions that have thrived in a new media landscape dominated by online channels.

Geography makes a difference
While research from Kantar Media shows that U.S. media spending for network television and spot television has remained flat over the past five years, this isn't the case in Central and Eastern Europe (CEE). According to December 2013 research by Group M, television's market share of advertising expenditure in the CEE region increased from 47% in 2006 to 52% in 2013. In fact, Internet advertising only accounted for 15% of 2013 advertising spend in CEE.

As a leading TV broadcaster in CEE, Central European Media Enterprises is a key beneficiary of the resilience of television advertising spending. As of the first quarter of 2014, Central European Media Enterprises boasts a prime-time audience share of at least 30% in each of the six CEE countries in which it operates. A better indication of Central European Media Enterprises' market dominance is a metric called the power ratio. The power ratio, which is calculated as a company's market share of advertising expenditure divided by its audience share, is the best measure of a broadcaster's ability to convert high ratings to actual advertising revenues.    

The results speak for themselves. Central European Media Enterprises' 2013 power ratio is as high as 2.4 times in its strongest market, Romania. While Central European Media Enterprises' audience share is only about 25% in Romania, its share of the Romanian advertising market is approximately 60%. This suggests Central European Media Enterprises' leadership position allowed it to generate significantly more revenues from television advertising.

Moreover, Central European Media Enterprises expanded its quarterly revenues by 15.4% year over year in the first quarter of 2014. Its growth rate is particularly impressive, compared with the 2008-2013 CAGR of 7.2% for U.S. Internet display advertising expenditure.

More importantly, CEE is still a growing advertising market with huge market potential. Based on its internal estimates, the average advertising spending per capita in the six CEE countries in which Central European Media Enterprises operates is about $34.60, compared with the developed markets' average advertising spending per capita of $347.

Dominating the media channel (TV) with the broadest reach in CEE, Central European Media Enterprises is well-positioned to capitalize on the convergence of CEE's advertising spend with that of the developed markets.

Source: Lamar Advertising.

Outdoor physical display advertising trumps online counterpart
Traditional outdoor media formats like billboards have existed for a long time, with the earliest record of billboard rental going all the way back to 1867. Outdoor advertising doesn't just have a long history, it's also one of the most cost-effective ways to reach a large audience.

Statistics from the Outdoor Advertising Association of America indicate the relative average cost to reach a thousand adults between ages 25 and 54 (CPM) via outdoor advertising is the cheapest among competing media channels at $3.43. In contrast, the CPMs for display advertising on Internet search sites and portal sites are $5.00 and $9.00, respectively.

Lamar Advertising, the second largest outdoor advertising company in the U.S. (in terms of number of displays), has remained in favor with its corporate customers because of the cost-effectiveness of outdoor media. It boasts a national footprint of approximately 145,000 billboards and is the largest provider of logo signs in the U.S., operating close to 89% of privatized state logo contracts.

Lamar Advertising's market leadership in billboards and outdoor advertising is protected by the fact that permits allowing out-of-home advertising are limited and mostly in the hands of incumbents like itself.

Lamar Advertising's financial track record is the best validation of the continued relevance of outdoor advertising. Since 1995 -- 19 years -- Lamar Advertising has maintained EBITDA margins in excess of 40%. During the same period, it has delivered negative revenue growth in only three of these years.

Foolish final thoughts
There are hidden gems within the traditional media space such as Central European Media Enterprises and Lamar Advertising. Central European Media Enterprises benefits from the fact that television continues to be the main media channel in CEE, while the value proposition of outdoor advertising as a cost-effective medium has kept Lamar Advertising alive.  

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Mark Lin

Mark is a private value investor and is the author of website which uses a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders.

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