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A Mixed Bag

Election spots have TV stations jazzed, but come Nov. 2, look for the post-election advertising blues.

The sluggish economy means that local broadcasters are seeing some growth in their core business but it's slow. Stations in swing states or those covering hot local races could post increases of 15% or more for the third quarter ending September.

But spending by regular advertisers—from restaurants to telephone companies—is growing just 5%-6%. So say TV-station and Wall Street executives in interviews and recent discussions about earnings.

The pace is better than in 2003, when even some of the strongest station groups posted tiny gains in non-political spending. Many did worse, posting slight declines. And it's not terrible compared with broadcasters' long-term performance, which averaged around 7% annually during much of the 1990s.

"Five percent is not a bad number," says Morgan Stanley broadcasting analyst Michael Russell. Even modest gains can firmly boost profits because an uptick in local sales drops to the bottom line.

But 5% core growth won't convince investors that local broadcasting is a viable business. Nor will it lift TV-station stocks out of their 15%-20% price slump this year. Yet Hearst-Argyle Television CEO David Barrett expresses confidence in the pace of growth beyond Nov. 2.

"The only category we know will be down next year is political. I don't go into 2005 with an expectation that other categories are going to drift back down," Barrett says. "Political won't be there in 2005, but, damn it, it's going to be back in 2006."

The good news: TV stations posted strong gains during the first half of 2004.

Last year, both stations and networks got slammed as advertisers panicked over the launch of the Iraq War. By comparison, this year's spending looked great—with a catch: Growth isn't as strong in the fourth quarter.

Harris Nesbitt broadcasting analyst Lee Westerfield estimates that non-political spending by local businesses is up 2%-5% in the fall. At the low end are weaker station groups, particularly those heavy on The WB affiliates. "At the upper end are CBS- and NBC-heavy groups," Westerfield says.

Reports are mixed for the most important ad category, automobile manufacturers and dealers, which accounts for 20%-25% of local TV ads. Car companies report an increase in spending, but not every major broadcaster is seeing gains. Plus, the Federal Reserve's bit-by-bit interest-rate hikes make financing more expensive. Even so, Merrill Lynch broadcast analyst Laraine Mancini remains bullish. She recently increased her fourth-quarter spending forecast due to the aggressive marketing of new models.

Belo Executive Vice President Jack Sander says the automotive business has "continued to be frustrating." Spending by foreign carmakers has been steady, but domestic manufacturers have held back. (Belo stations are seeing auto gains in one market, declines in another.) Sander adds that packaged goods, health care and food products are still floundering.

Sinclair Broadcasting CEO David Smith says strong categories for his company include infomercials, schools, fast food, telecommunications and medical. "Soft drink, retail, restaurants, beer and wine were down," he adds.

One positive note: Spending by retailers is surging. An executive at a major station group says the confidence of retailers like Target and Macy's is a good indicator of the broader economy. Says Westerfield, "Retail is one of the strongest categories in national spot."

But the big news of 2004 is political spending; it could account for 10% of Hearst-Argyle's revenues for the entire year. For Scripps stations in battleground states, political-ad revenue has tripled since 2000, says Scripps CEO Ken Lowe.

By contrast, ABC's O&O stations aren't seeing much political spending. Merrill Lynch predicts the Disney division will see combined political and non-political revenues increase just 4% during the September quarter. The reason is geographic: Its biggest properties are located in New York, Los Angeles and Chicago, the no-fly zone of presidential-ad buyers.