Nine Entertainment/NEC/Seven West/SWM

There’s lots to like about Nine. Number one in many categories, an ostensibly “cheap” way to play REA through Nine’s holding in DHG, a growing digital arm.

The balance sheet is reasonable, it’s got a buyback, and cashflows are normally quite good.

Equally, ad spend remains a big part of the business, and right now, ad spend is quite depressed.

Both NEC and SWM highlighted the double digit declines in tv ad spend, and the decline in radio media ad spend. The below graph is from SWM. Broadcast video on demand (BVOD, blue) is the stuff that has to replace the more traditional legacy media, which is in a mix of structural decline and cyclical downturn.

How does one manage to have an ad spend decline when there’s record unemployment?

It’s not an unreasonable question. Some think the Aussie economy is in rude health. But I would argue that advertise when there is demand worth competing for and don’t advertise when there’s no demand. To that end, advertising is about as cyclical as it comes and is often a good early warning indicator of a slowdown.

Now the unemployment rate is rising from low levels, retail sales are declining from high levels, and bank arrears (Judo bank, WBC/NAB/ANZ/CBA) are rising. Taken together, they help explain what’s going on with ads, even as one must be mindful of that structural issue.

So, to conclude, lots to like about NEC, and it, and SWM, are both some of the cheapest stocks in the market. But perhaps better to wait for evidence that the ad cycle is turning up, first. The moment they announce that, the shares will pop, but they are cheap enough that it won’t matter overmuch.

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