EUROPEAN media stocks have taken a battering over the past two months as listed broadcasters and publishers complained that advertising, a key source of revenues for the sector, was weakening.

Media stocks are not for the faint-hearted as their fortunes fluctuate with the wider economy. “Advertising spend is cyclical and it has fallen off a cliff of late in the UK,” said Leigh Webb, a London-based analyst with Panmure Gordon. “It started off in radio and TV and affected print to a lesser extent.”

Chrysalis, the UK group whose interests span radio stations, music publishing and recording and book publishing, and GCap Media, the UK’s largest commercial radio group, have both bemoaned a tightening of airtime ad budgets in recent weeks. The effects are evident in their share prices.

Chrysalis has slumped 18% this year and is trading at £1.49 (€2.23). GCap, whose flagship station Capital FM is home to big name DJs such as Johnny Vaughan, is hovering around £2.92, having lost a third of its value over the same period.

The decline in advertising expenditure has mirrored a downturn in consumer confidence in Britain, as people fret about job security and where the property market is heading. Sector watchers say there is a well-established link between the housing market, consumer spending and the advertising market.

There are some anomalies in the sector, however, according to Anthony Conroy, an investment manager at Eagle Star. “Telecinco and Antena 3 in Spain have both done very well so far this year, primarily because the economy there is doing well,” he said.

Telecino’s stock has surged 25% since early January to stand at about €19.19.

It’s been tougher for the wider industry, however, and this has been compounded by the fact that there are no global sporting events to boost spend. Last year, the Olympics and the American elections, another money-spinner for the sector, added one percentage point to global advertising growth, according to Webb.

The pall of gloom hanging over British shoppers is nothing to the dour faces of consumers on continental Europe, according to Thomas Grillenberger, a Munich-based analyst with Bayerische Landesbank.

“There is little reason for advertisers to get excited in big economies such as Germany and France as consumer spending remains very weak and there are no signs of improvement,” said Grillenberger.

ProSiebenSAT.1 Media, the German TV broadcaster, warned last month that an already beleaguered advertising market was getting tougher at home — leaving the stock down almost 10% so far this year at €13.64.

So, when is the best time to tune into media shares? “Investors should think about buying into the sector as soon as there are signs of a pick-up in the economy or consumer spending,” said Grillenberger.

“Now could be a time to buy, as expectations are fairly low for the sector and consumer spending remains depressed. You could take a contrarian view and look forward to the benefits of the World Cup next year.”

Meg Geldens, an analyst with Investec Securities in London, does not see a rising tide effect for the sector any time soon. She believes investors looking to get into media stocks should choose on a stock-by-stock basis. “Although the sector has a reputation for being very cyclical, there are some defensive stocks, such as Reed Elsevier,” she said.

Reed Elsevier, the Anglo-Dutch publishing giant, sells a lot of its science, medical, legal and education journals and electronic data by subscription, meaning that there is a degree of stability in its revenue streams.

Telecinco and Antena 3 look interesting, said Conroy, as they continue to operate against the backdrop of a robust advertising market. He cautions that both of the shares have a reputation for being volatile.

United Business Media, the UK business information services provider, counts among Webb’s favourite plays in the sector, as the company has focused on cutting its costs and acquiring good businesses. He believes investors should steer clear of British radio stocks — except GCap. “GCap’s shares have a good dividend yield of over 6%, which protects it,” said Webb.

Many media companies are in a better financial shape now than they were after a frenzy of merger and acquisition activity in the late 1990s. “They really had to work hard at lowering debt after that acquisitive phase,” said Geldens.

Having paid down debt, many media companies are finding themselves with cash in their coffers for the first time in years. This has spawned a new wave of consolidation in the sector, though analysts say prices being paid for assets are not as high this time around.

“It started off last year with Granada merging with Carlton to become ITV, then you had GCap Media resulting from the merger between Capital Radio and GWR,” said Webb.

Emap, the British media group, acquired a 27% stake in Scottish Radio Holdings (SRH) about 18 months ago. Two weeks ago, SRH rejected a £10.40-a-share takeover offer from Emap.

While there are hopes that stock valuations will benefit as consolidation within the sector continues, investors have often been left with sizeable losses by buying into takeover speculation that fails to materialise.