How Commercials Impact Stock Prices

May 14, 2010 | Filed Under » ,
Tickers in this Article » MCD, WEN, GOOG, BUD, TAP, DPS
Stock prices are driven by a range of fundamental, technical and psychological inputs. Technical and sentiment factors will usually result in short term market movement before shares revert to their intrinsic value dictated by the underlying fundamentals. Although these are the three broad market driving categories, each broad component can be dissected into specific minor elements that influence the major factors. IN PICTURES: 20 Tools For Building Up Your Portfolio

Advertising is a prime example of a minor element that influences the fundamental and psychological components of stock returns.

Basically, a clever and effective advertising campaign increases product awareness and builds brand equity, increasing current and future product demand. Studies even suggest that advertising creates the perception of better quality goods. Such effects lead to improved sales and earnings figures, inevitably increasing shareholder value.

Advertisement Effectiveness
In 2003 McDonalds (NYSE:MCD) saw their sales slipping as the restaurant was heavily criticized for the growing obesity problem in the United States. In fact, McDonalds saw their first quarterly loss, an astonishing $343.8 million that quadrupled analyst expectations. The company was in desperate need of a marketing campaign that would help transform the negative stigma associated with fast food.

"I'm loving it" was the solution. McDonalds saw year-over-year second quarter sales increase by 7.8%, the largest jump in over a decade. Eleven months after the campaign was launched, its shares had appreciated by 26.5%, outperforming the S&P 500 by over 18%.

Advertising Theory
Advertising can be viewed through multiple perspectives. The combative theory suggests that firms will market their products in order to gain market share at the expense of their competitors. On the other hand, the advertisement economies of scale theory states that marketing initiatives of one company raise the overall awareness of the industry.

Since 2003 was characterized by a negative association with the general fast food business, "I'm loving it" helped restore faith in the sector by drawing attention to fast food product quality. Wendy's (NYSE:WEN), for example, outperformed the market by 7% during the same time interval, giving investors a return of 15%.

The Beer Industry
Beer commercials are often humorous, witty and aim to evoke positive associations with their products. This industry is a prime example of the two previously mentioned theories working in tandem with one another. Average alcohol consumption has increased by 24.7% in the top 30 consuming countries after 1960. Despite the growing amount of research indicating the adverse effects of alcohol, the advertisers are winning the battle.

With the average beer drinking Canadian consuming 70 liters of beer annually, marketers have done their job of creating demand for alcoholic beverages. Now, commercials like Anheuser-Busch InBev's (NYSE:BUD) "WASSUUUUUUUP" Budweiser commercial and Molson Coor's Brewing Company's (NYSE:TAP) "I am Canadian Rant" Molson Canadian commercial will compete for their slice of the total market share.

Good commercials in any industry can lead to enhanced customer relations and steady repeat business, and this reduces EPS volatility. Financial statement figure consistency should increase the value of the analyzed stocks

Immediate Stock Effects
If advertising increases product demand, and product demand increases revenue, and revenue increases earnings, and earnings increase share price, and share price is often based on forward looking opinion, then should a single outstanding commercial increase the value of a particular stock in anticipation of higher product demand? Perhaps.

Super Bowl XLIV was watched by 106 million people; 106 million people who could possibly be influenced by a clever advertisement. Google's (NYSE:GOOG) Paris Romance was praised as one of the best commercials. The title officially went to the Betty White Snickers ad, but Snickers is owned by a private company. Dr. Pepper's (NYSE:DPS) Kiss for Cherry commercial found itself on the opposite side of the scale.

The following Monday, shares of Google finished in the black while those of Dr. Pepper were in the red. Obviously, this single observation is far from having statistical significance, but with further analysis, it might prove to be a helpful trading strategy.

Bottom Line
An ineffective advertisement, one which does not evoke immediate product interest and fails to increase long term firm growth, is simply an unnecessary expense on a firm's income statement. On the other hand, a solid marketing campaign can completely rebuild a company's image and increase demand for its product or service.

While investors generally think of a manufacturer's shipping orders and employment data as leading indicators utilized for stock analysis, perhaps commercial quality can be added to that list of tools as well. (For more stock analysis, check out Long-Term Utility Dividends.)


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