What: Seven West Media Group Limited (ASX: SWM) provided a market update on Tuesday 24th April 2012, stating “…previous expectations of the market strengthening in the final quarter are unlikely to be met”.
The directors updated full year Earnings Before Interest and Taxes (EBIT) to be in the range of $460m to $470m. Considering the company made $309m in the first six months to December 2012, the company is forecasting to make just $150m to $160m in the second half. That’s a 50 per cent fall in EBIT. No wonder the shares fell 17 per cent.
So what: Along with retailing, media is the other sector of the Australian economy struggling. As I mentioned in this article on Ten Network Holdings Limited (ASX: TEN), advertising revenues were down across the whole market, and in the free-to-air television market, that’s your major source of income.
Another issue affecting the free-to-air TV sector is the rise of portable media devices, with smart phones and iPads now better equipped to view high quality video and TV. With a wealth of high quality media available online, perhaps it’s no surprise more and more people are turning off free-to-air TV, and switching to other forms of entertainment.
It’s a never ending downward spiral, with more advertisers moving to where consumers will view their ads, further destroying the free-to-air broadcaster’s income.
With loads of debt backed up by intangible assets, consisting mainly of those same free-to-air TV licences, media companies such as Seven and Ten could face more issues in the not too distant future.
Now what: It’s no real surprise that free-to-air media is in the same precarious situation as the major retailers, such as David Jones Limited (ASX: DJS) and Myer Holdings Limited (ASX: MYR).
Both sectors appear to be undergoing structural shifts, which don’t appear to be good news for the health of the companies in those sectors. It may be an idea for investors to avoid these companies until the future becomes clearer.
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Motley Fool contributor Mike King doesn’t own shares in any of the companies mentioned. Take Stock is The Motley Fool Australia’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).
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