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Published: September 15, 2009
"Advertising is totally unnecessary. Unless you hope to make
money."
- Jef I. Richards
What's true for companies is also true for investors.
Advertising spending can be a leading indicator, one that
provides valuable information on future stock-market leaders and
laggards.
Professor Richards' quote acknowledges the power of advertising,
which can put companies in a position to connect with their
customers, bring in more revenue and reap higher profits.
But a number of companies, in these challenging times, are
cutting back on their advertising budgets. This could trigger a
downward spiral, leading some companies to even lower revenue as
fewer customers are exposed to their products.
To profit from this, all investors have to do is follow the
money -- the advertising money. And for that, data from the
media information company Nielsen is a great place to start.
Nielsen says advertising spending was down -15.4% in the first
half of the year, which should come as no real surprise in this
tight economy. Even less surprising was the drop in advertising
spending by both auto manufacturers and car dealerships, which
trimmed their ad spending by -31.4% and -26.2%, respectively.
The Nielsen report also contained a few surprises. The
pharmaceutical sector is traditionally a stalwart during
economic downturns. From the market's perspective that has held
true. The Dow Jones U.S. Pharmaceutical Index has eked out a
+0.5% gain In the past 12 months versus the S&P 500's -14.3%
loss. But when it comes to ad spending, drug makers started
tightening their belts, cutting back on ad spending by -11.3%.
Once ad spending falls, more
cutbacks generally follow. For
instance, Eli Lilly (NYSE: LLY)
trimmed its advertising in the
second quarter. This week it said it
was cutting -13.6% of its work
force. Advertising also may have
been the tip of the cost-cutting
iceberg for Pfizer (NYSE: PFE),
which is ratcheting back on just
about everything as it prepares to
pay for its $6.8 billion acquisition
of Wyeth (NYSE: WYE).
Not every sector is hunkering down.
One product group, in fact, more
than doubled its ad spending in the
first half of the year: Smartphone
companies increased their ad
spending by +104%. The devices,
which can access the Internet, play
video and support a myriad of
applications, are selling strong in
this otherwise cautious economy.
The biggest beneficiaries of the
smart phone advertising may not be
limited to the phone manufacturers.
Manufacturers, after all, just sell
the phone. It's wireless providers
that sign up smartphone users and
generate multi-year revenue streams.
Companies like Verizon (NYSE: VZ),
Vodafone (NYSE: VOD), and AT&T
(NYSE: T) stand to gain,
piggybacking off the burgeoning
manufacturers' ad budgets.
As an investor, you want a company
to believe in its ability to grow
profits. While almost every company
will talk the growth talk,
advertising spending is a good
indicator that a company is walking
the growth walk.
-- Amy Calistri
Editor
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