Online ad spending will surpass national TV in 2015, according to Standard and Poor’s.
From Industry Report Card: The Media And Entertainment Industry Is Casting For Green Shoots
We expect core ad spending to grow at or slightly less than the rate of GDP, in a convergence of several trends. Print-based advertising is likely to continue to contract while online ad revenue continues to grow at a pace well ahead of GDP.
We think that in 2015, total online including search will surpass national TV (including broadcast networks, national spot, syndication, and cable networks).
Proliferation of online ad inventory–in particular discount “remnant” inventory sold on ad networks–hampers pricing across all online advertising–even prime inventory. It constrains pricing in TV, and it has a deflationary effect on print. We think that the larger online gets, the greater the pricing drag may be on total ad spending growth. Certainly, low-cost, highly measurable advertising brings efficiencies to small and large marketers. But in aggregate, we think these trends are likely to preclude a return to total ad spending growth in the solid mid-single-digit percent range (or higher) that we witnessed in the 1980s and 1990s.
Although Standard & Poor’s believes economic growth will gain a more solid footing in 2013, ad spending–historically highly correlated with the economy–is only showing scattered signs of improvement thus far. Our economic forecast assumes that key economic data begin to improve from the March trend. In the meantime, we believe the strongest growth will be in Internet display advertising, Internet search, and cable networks. Key factors that could affect media and entertainment companies include:
- An economic recovery that could pick up in 2013, despite still-high unemployment;
- Investor and marketer worries over European and U.S. budget deficits, and the continuing U.S. debt ceiling drama;
- Dependence of ad spending on stable GDP growth and consumer spending;
- Vulnerability of non-advertising-driven subsectors to any adverse shift in consumer spending; and
- Severe leveraging in several subsectors, which many companies may be unable to withstand.
For details by media sector, see the full Industry Report Card
Technology companies rated by Moody’s are expected to pay out $44.4 billion to shareholders this year, up 35% from last year.And after its recently announced 15% dividend increase, Apple will pay out more than $11 billion in 2013, the most of any company in the US non-financial sector.
The top 10 US tech companies will account for 84% of the sector’s dividends this year, with Apple, Microsoft and Intel expected to comprise 54% of the total. Apple will account for 48% of the sector’s dividend growth, while Microsoft and Cisco combined will account for another 16%.
In addition, more Moody’s-rated technology companies are paying dividends. The number had increased to 31 at the end of 2012, from 29 in 2011 and 20 in 2007.
We believe the increasing number of dividend-paying tech companies reflects the strength of these firms’ business models, management confidence in cash flow generation prospects and, in some cases, pressure to return capital to shareholders.
Rising dividend payments won’t affect companies’ credit ratings, Moody’s notes. Although technology firms have been implementing and raising dividends slightly ahead of growth in cash flow generation, dividend payments relative to cash flow average a low 20%, compared with 50% for non-tech industries.
And Moody’s expects that most dividend-paying tech companies will keep payout ratios below 30% due to tax-inefficient access to overseas liquidity, operational requirements and company-specific strategic considerations. Many technology firms keep the bulk of their cash overseas and if this were used to pay common dividends, they would be subject to US repatriation taxes.
Overall, US tech companies are well positioned to support dividend payments in the event of economic downturn, Lane says. “Stable cash flows and strong liquidity should enable the dividend-payers to weather potential financial or geopolitical shocks to the global economy.”
For details, see US Technology Industry: Dividend Payments to Continue Climbing, but Payout Ratios to Remain Low.
The degree of global oversight of systemically important insurers will remain lighter than for systemically important banks, says Oxford Analytica.
Competitive global pressures are leading to a commonality in certain key aspects of insurance regulation — as some regulators seek to avoid disadvantaging their country’s companies in global markets. However, the regulatory regime for insurers remains heterogeneous in comparison with the regulatory regime for banks and securities houses (see Basel ‘flexibilisation’ may be reversed ).
With more differentiated regulatory regimes across economies, multinational insurance companies have a powerful incentive to relocate to jurisdictions that reduce regulatory costs.
Recent International Association of Insurance Supervisors (IAIS) proposals concerning the criteria for identifying global systemically important insurance companies, which centre on the methodology for identifying these firms, are often seen as the start of a more global regulatory framework for the industry.
The methodology would involve three steps — collecting data, assessing it and implementing a process of supervisory judgment and validation. Once an insurance company has been identified as a globally systemically important institution, the national regulator is expected to work on a plan with it for reducing its systemic risk via a number of channels, such as higher capital requirements in order to increase its loss-absorbing capacity.
Despite the drive to promote a global regulatory framework for insurers, actual oversight and implementation continues to be at the national or regional levels — as happens with banking, despite Basel III. Moreover, the absence of an institution such as the Bank of International Settlements (BIS) means that the IAIS proposals are even more open to wide interpretation than the Basel III rules.
For details, see: Uneven insurance regulation fuels risks $$
Fitch Ratings sees sustained consolidation in the specialty pharmaceutical sector as small market players try to effectively compete with larger market participants and favorably negotiate reimbursement with commercial and government payers.
Merger and acquisitions among small drug producers is the most common way specialty pharmaceutical manufacturers build scale. On occasion, small specialty drug firms take advantage of major consolidation between larger drug firms by purchasing divested marketed products required by antitrust authorities.
In a new special report Specialty Pharmaceuticals Snapshot: Key High Yield Consolidator Trends and Targets, Fitch Ratings examined the specialty pharmaceutical segment for corporate consolidation opportunities that could address current needs of three key high-yield drug makers – Valeant Pharmaceuticals International Inc., Endo Health Solutions Inc., and Warner Chilcott Plc.
The three specialty pharmaceutical companies have different business development approaches, yet all potentially moderated by debt incurrence covenants in secured bank facilities.
From Fitch Ratings
Fitch’s outlook on the U.S. technology sector is stable for 2013 despite weak revenue expectations.
Fitch believes the U.S. technology sector will experience negative revenue growth in the low single digits in 2013, as a confluence of factors ranging from the U.S. debt ceiling, Europe’s debt crisis, and China’s government changes has resulted in excess caution from customers. Various factors should serve as mitigants to the weak macroeconomic environment such as the launch of Windows 8 and Windows Server 2012 and continued long-term secular tailwinds related to security, cloud, analytics, tablets, automation, and emerging markets.
The stock prices of some of the largest technology debt issuers plunged in 2012, as long-term growth expectations are being reset downward. HP, Dell, Western Union, and Xerox have experienced significant pressure on their stock prices. While the headline risk for Dell and HP are likely overblown, Fitch does believe the risks related to Western Union as an LBO candidate are viable, as the company’s enterprise value to EBITDA has declined to 6.1x. It is questionable whether Western Union’s current market capitalization of nearly $8 billion could be financed in this challenging environment.
Fitch believes the majority of the technology sector will be able to withstand a downturn and perform as it did in the 2008-2009 recession.
However, there are several important factors that make current businesses less flexible than in 2008-2009, including significant secular issues (printing, tablets, new chip technologies), a fiercer hardware competitive landscape, and higher dividend commitments.
See the full report 2013 Outlook: U.S. Technology ($)
From Standard & Poor’s Credit Research
TV broadcasters worldwide face rapidly changing business conditions. A weak global economy continues to affect core advertising spending, while evolving alternate entertainment options have fragmented audiences and raised concerns among investors that ad spending could migrate to these new options.
We believe that the culmination of these factors could weaken TV’s long reign as the king of all media but not likely harm the credit quality of TV broadcasters in the long run.
We forecast a U.S. ad spending decline of 1% in 2013 from 2012. This includes the loss of about $3.7 billion in political and Olympics spending that benefited results in 2012. Excluding these items that largely occur in even-numbered years, we expect core advertising spending will rise 0.8%. This is lower than our expectation of 2.2% U.S. GDP growth.
We expect local television core advertising to grow in line with GDP growth. For the TV broadcasters, 2013 will present somewhat tough comparisons to 2012. In 2012, TV broadcasters experienced a recovery of auto advertising, which was down significantly in 2011 as a result of the Japanese earthquake and tsunami in March 2011. The fourth quarter of 2012 marked the end of easy comparisons for auto spending.
See the full report ($) Ratings On Global TV Broadcasters Are Stable In 2013 Despite A Weak Economic Outlook And Long-Term Audience Fragmentation
From Moody’s Investors Service:
Unless the White House and Congress reach an agreement in the next two weeks, the tax increases and expenditure cuts mandated by the “fiscal cliff” agreement will undercut US economic growth in 2013. The combination of fiscal effects and an uncertain environment for business investment might even tip the nation back into recession.
A new recession would have at least some negative consequences for virtually every US non-financial corporate sector, and certain industries would bear the brunt of this risk, while defaults would inevitably rise among corporate issuers at the low end of the rating spectrum.
While the effect of higher taxes and government spending cuts is difficult to forecast, certain US industries would bear the brunt of the risk. The Automobile, Gaming, and Lodging and Cruise sectors could suffer if consumers pull back their spending, while the already struggling newspaper industry would come under increased pressure. Paper producers would also come under far more stress.
A contraction in the US economy would also lead oil prices to drop below Moody’s current assumptions for 2013, though oil prices would still probably remain strong by historical standards. The effect on upstream segments of the oil and gas industry would depend on how quickly companies adjust their cost structures, while the Refining and Marketing sector could face additional margin pressure amid an ebb in demand from the US and China.
Some sectors would avoid the worst effects of the fiscal cliff, despite ostensible risks, Moody’s says. Airline companies can cut capacity if bookings moderate, while the Building Materials sector has at least a low level of guaranteed government spending in place through the end of 2014.
And the rating agency assumes that the Aerospace and Defense, For-Profit Hospitals and Medical Products and Device sectors, which all at least partly depend on government spending, will see sharp cuts in that spending regardless of the outcome of negotiations in Washington.
See the full report US Non-Financial Corporate Industries: Fiscal Cliff Poses Biggest Risks to Auto, Newspaper, Gaming and Lodging Sectors
From Moody’s Investors Service:
Online retailers, particularly Amazon.com, Inc. and Ebay, Inc., have proven the viability of the internet as a retail channel. But the traditional brick-and-mortar retailers have the ability and will to eventually become powerful players in the markets that the online retailers have largely developed.
The office supply and auto parts sectors are among the furthest along in the integration of physical stores and online capabilities. They have a large number of stores and potentially the most advanced and efficient delivery networks and integrated web sites.
Internet sales, while continuing to grow rapidly, still represent only a mid-single-digit percentage of total US retail sales, a number that includes the internet operations of the brick-and-mortar retailers. Many consumers have not yet made meaningful online purchases, and some potentially never will. Smartphones, which are key to the concept of “showrooming,” are still not optimally used or penetrated.
Most brick-and-mortar retailers already have fully developed proprietary supply chains that could be further leveraged to accommodate online sales.
The sales-tax advantage that many online retailers presently enjoy seems to be abating as states step up their efforts to force collection of these taxes.
See the full report ($) US Retail: Brick-and-Mortar Retailers Beginning to Flex Muscle Online
Brick-and-mortar retailers, especially on the big box side, already have internet capability, and in some segments such as office products, have been using the web for over a decade.
Automobile component suppliers such as BorgWarner, Delphi and ZF Friedrichshafen stand to benefit the most from the new fuel economy and emissions standards enacted in August 2012 by the U.S. Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA).
From Fitch Ratings
Fitch expects auto manufacturers will employ various solutions to meet the new standards, including the development of more efficient powertrains, an increased use of electrification and a greater use of lightweight materials. However, much of the development work will go towards increasing the fuel efficiency of traditional internal combustion engines, which Fitch believes will still be the primary form of propulsion for most light vehicles in 2025.
Although the new standards do not take effect for several years, auto manufacturers and suppliers are already investing heavily in research and development to meet the new requirements, making this a credit issue now. Achieving the new targets will be a significant challenge for auto manufacturers, but certain auto suppliers stand to benefit significantly from the new rules.
In particular, suppliers of technologies that improve engine fuel efficiency, transmission and related components suppliers, and suppliers of technology used in hybrid and electric propulsion systems stand to benefit the most.
Nonetheless, meeting the standards will involve various risks, including a potential for problems with new technologies, materially higher vehicle production costs, and, perhaps, a lack of customer acceptance of vehicle design changes.
See the full report ($) The New U.S. Auto Fuel Economy and Emissions Standards: What They Are and Who Will Benefit
From Standard & Poor’s Credit Research
Our outlook for U.S. personal care, consumer services, apparel, and tobacco companies continues to be slightly negative for the remainder of 2012 and into 2013. This incorporates our base-case forecast for continued slow growth in the key U.S. macroeconomic factors that influence the consumer products sector, including consumer confidence and spending. This, together with worsening economic conditions in Europe and continued deceleration in emerging market growth, will moderate the global demand for consumer products, we believe.
Though we expect economic growth to pick up, we believe the U.S. recovery will remain modest and sluggish. Our credit outlook for these sectors is slightly negative.
Also, we believe participants will face headwinds from foreign currency translation and still-high costs of some commodities (such as fuel and oil based resins), though some will begin to benefit from lower commodity costs (such as cotton and natural gas) during the second half of 2012.
See the full report ($) Industry Report Card: U.S. Personal Care, Consumer Services, Apparel, And Tobacco Companies To Face Continued Credit Pressure Into 2013