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Two analysts and top management from two sector firms examine the consumer sector in this special 19-page Management Consulting & Market Research issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info454.htm

TWST: What’s happening between the advertising downturn and these marketing services companies at this point? How does one impact the other?

Mr. Doft: That’s a great question. Historically, the theory had been that in economic downturns the marketing services businesses would hold up, as opposed to advertising, which would get hit. The reason for that is traditional advertising as we know it — TV commercials, print ads, etc. — is not that measurable. When you put the ads out there you can get the general demographics of the people who are seeing them from market research, but you don’t know who is really reacting to those ads or what sort of sales they are driving. So it’s a bit more fuzzy. When companies are looking to cut back in downturns and save some money, that tends to be one of the first places to go. On the flip side, some of the marketing services available are much more measurable in terms of the return on investment of the campaign. For example, direct marketing, by definition, elicits a response. Therefore you know how many people responded to your direct mail piece, phone call, infomercial, etc. You’ll know how much product they bought and whether or not the campaign was successful. So those campaigns tend to continue even in difficult environments, because companies know that they are profitable and will drive sales. Historically — and I’m saying historically because this downturn has been a bit different from others — we have seen companies tend to shift dollars from traditional advertising to areas such as promotions (couponing and other types of discount events) in order to drive sales. Companies like the automobile manufacturers are not putting up so much national branding campaigns but more local campaigns that are offering incentives such as zero-percent financing driving consumers into their dealerships. That’s a great way to look at it.

TWST: Let’s look at the direct marketing companies.

Mr. Doft: The best one in my universe, on the pure-play side, is Harte-Hanks (NYSE:HHS). Harte-Hanks does some of what Acxiom does, but they also do the creative and execution of direct marketing campaigns and direct mail campaigns. They have been hurting and their revenues have been declining for the last three or four quarters. They also started getting hit early in the cycle as Acxiom (Nasdaq:ACXM) did on the database side, but it is being exacerbated by the slowdown among some of the key verticals that they service, particularly retail and financial services. Now the anthrax concerns can potentially cause another hit to their numbers in the fourth quarter. That’s a name we have a Hold rating on, and we’ve had that rating given the concerns about growth for some time, but now we are even more concerned because they’re much more directly exposed to a potential hit on the industry from anthrax than Acxiom. Acxiom doesn’t actually execute campaigns, whereas Harte-Hanks does.

TWST: Do they have the financial resources to weather through a short-term — two- to three-quarter — downturn?

Mr. Doft: Harte-Hanks has a very strong balance sheet. They have just a little bit of debt on the books, and that’s mostly from aggressively buying back stock. They also generate a lot of free cash, because they have a small piece of their business, which is more of a publishing business, but it generates a lot of free cash. So they have a very clean balance sheet, are very strong financially, and have been supporting their stock. This has helped the stock hang in there, even though business has been tough.

This special issue includes:

1) Outlook for Marketing & Advertising Services - In an in-depth (5,700 words) Analyst Interview, David B. Doft, Managing Director and Senior Analyst at ABN AMRO, examines the outlook for the sector and shares specific stock recommendations.

2) Management Consulting & Market Research Companies - In an in-depth (3,500 words) Analyst Interview, Alan K. Creech, Vice President, Consumer Information Technology at Emerging Growth Equities, Ltd., examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of two sector firms examine the outlook for their firm and the sector.