While display advertising will be flat to down 10%, search and lead generation should do better "as advertisers allocate more budget to the highest ROI channels," wrote analyst Ross Sandler in the report that covers companies including InterActiveCorp (IAC), Marchex, InfoSpace and agency MDC Partners.

As a group, they've been hit hard by the economic downturn, with stock prices down 47% on average from a year ago. "Unfortunately, we believe that 2009 will be a similarly difficult environment to 2008," Sandler said. Given the bleak ad outlook, he points to IAC as the best place for investors in the sector to "hide out" until conditions improve.

In addition to trading cheaply (at three times 2009 adjusted earnings), IAC's upside includes $500 million a year in revenue through its search partnership with Google, expanding margins and little exposure to the weakness in online advertising, according to the RBC analysis.

The outlook for other online ad-related companies in the report is as follows:

Infospace

With search proving more recession-proof than display advertising, search and directory provider Infospace is expected to benefit from the shift toward performance-based advertising. With $191m in cash and $7 million to $9 million in quarterly adjusted earnings, Infospace is well-positioned to weather the downturn and "potentially emerge as a much stronger competitor on the back side of the cycle."

Marchex

While the company continues to see strong growth in its local online ad business--which accounts for almost half of its revenue--national advertising via its AdSense rival Adhere network could shrink in 2009.

With national advertising clients in weakening categories such as retail, financial services and education, Marchex is vulnerable to tightening budgets and cancellations as a second-tier network. "Consensus estimates call for 9.4% revenue growth and 14% (earnings before interest, taxes, depreciation and amortization) growth, which could prove aggressive if non-search advertising is flat to down 10%."

MDC Partners (MDCA)

The agency's business should hold up better than others because of factors such as having mostly retainer-based work, new accounts and better diversification of advertising clients. It gets no revenue from the automotive segment and only 7% from financial services.

RBC points to new business including subsidiary Crispin Porter + Bogusky winning the Old Navy account in late September. Annual billings are estimated at $200 million, but revenue from the new business will not show up in results until 2009. With a quarter of revenue overall coming from project-based work, MDC is also exposed to budget cutbacks that may result from a recessionary economy.

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