Can Mega Ad Agencies Survive Until Next Super Bowl?
Investors need to look beyond which Super Bowl ad wins plaudits to determine which agency seems to have the best strategy for succeeding.
We know the Ravens won the game, but who won the battle for buzz? Was it Samsung (PINK:SSNLF) with its Paul Rudd-Seth Rogen takedown of other ads? Anheuser-Busch InBev (NYSE:BUD) with the baby Clydesdale? Procter & Gamble's (NYSE:PG) Joe Montana-shaped miracle stain? Or Nabisco's (NASDAQ:MDLZ) rapid response to the Superdome power outage?
Whichever ads are generating the most water-cooler chatter this week, bragging rights are on the line at agencies owned by advertising giants such as Dentsu (TYO:4324), Interpublic (NYSE:IPG), Omnicom (NYSE:OMC), and Publicis (PINK:PUBGY). The goal for advertising teams may be to make lists like the USA Today Ad Meter (which gave the crown to the Clydesdale ad) and perhaps win some awards, but for publicly traded advertising and marketing companies, winning the Super Bowl ad derby simply isn't enough.
At a time when the advertising business is being completely transformed by digital media – and as prices for display advertising online continue to decline – investors considering these companies need to look beyond which Super Bowl ad wins plaudits to determine which agency seems to have the best strategy for succeeding in this reconfigured world. Here's a look at three of the top advertising giants.
Shares of WPP PLC (NASDAQ:WPPGY) the world's largest group of agencies (and owner of names like Young & Rubicam), recently hit a 13-year high. Last fall, WPP cut its profit forecast after its struggling clients pared back their advertising budgets and analysts at Wells Fargo and Morgan Stanley adopted a more cautious view on the stock, suggesting it is one to hold but not to acquire more of at present. Remember that retail sales over the holiday season were a mixed bag, so advertisers may yet decide to remain cautious and keep their spending for the early part of 2013 at conservative levels.Other analysts have been more bullish, with Jefferies upgrading the stock from "hold" to "buy" last week on a combination of "encouraging" 2013 ad budgets from the likes of Unilever and low expectations for the business.
Not only is WPP expanding in the digital arena (it recently announced the purchase of Salmon Group, a digital advertising business, for an undisclosed sum), it has also become a big player in many of these emerging markets, with nearly a third of its sales coming from Asia, Latin America, and other emerging markets, parts of which are still seeing a consumer culture evolve. Even in other areas where advertising is common – like China and parts of Latin America – with every year that passes, millions more citizens become affluent enough to make purchase decisions based on those ads
Omnicom, the second-largest agency holding company and owner of BBDO and other iconic agencies, has been an avid acquirer in the digital media space. It has created a kind of "trading desk" to better match companies' banner display ads with the right spot on the Web. With research firm eMarketer calculating that digital advertising topped $100 billion annually last year and predicting it will grow another 15 percent this year, to make up more than 20 percent of all advertising spending, Omnicom and its rivals can't afford to sit idly by. Indeed, eMarketer projected that by 2016, digital ads will account for a quarter of all advertising.
Interpublic Group of Companies is significantly smaller than its top rivals, with a market cap of slightly more than $5 billion compared to nearly $20 billion for WPP and $14 billion for Omnicom. Interpublic has been through a very rocky stretch dating back more than a decade. "During the bull market of the 1990s, Interpublic acquired 400 companies in a four-year span," Morningstar analyst Michael Corty wrote last October. "It took the company the better part of the last decade to clean up the mess through dispositions, financial restatements, audit fees, and restructuring costs." Value investors such as Steven Romick, manager of FPA Capital, have been buying, and some analysts see indications that industry trends – like "pay for performance" models – are moving Interpublic's way.
These ad holding giants aren't easy companies in which to invest. The digital media universe is in a continuous stage of evolution, and simply betting on higher-growth emerging markets is no panacea, as any company who counted on Chinese growth to offset sluggish sales in North America and Europe could tell you. But to the extent that you want to pick up a piece of the action, look for companies that can back up the flashy Super Bowl ads with real growth prospects in the digital and emerging worlds.
Editor's Note: This article by Susan McGee originally appeared on The Fiscal Times.
For more from The Fiscal Times:
Super Bowl Ads: Three Rookies Looking to Score Big
How Coke Beat Pepsi in the New Cola Ad War
Mad Men Advertising That Would Change America
Follow The Fiscal Times on Twitter @TheFiscalTimes.
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