Brian Weiser‘s Pivotal Research Group has released a groundbreaking piece of equity research on the major advertising agency holding companies. Highlights include:
Top pick is WPP. “We like the company’s long-term exposure to China — possibly the most significant of any western media-related company — its independent digital platform and its dominant media services business.
IPG is a “strong story” stock. “We believe that there is also significant upside in Interpublic, as the company continues to build confidence with the investor community about its ability to bring operating margins up to peer levels and sustain competitive organic revenue growth.
OMC is a “bellwether approaching fair value.” “While we — and much of the agency industry — have long been impressed by Omnicom the holding company and its component business units, the stock is closer to “fair value” than either of IPG or WPP.”
The report concludes that agencies have durable, long-term operating margins and that the industry has been a primary beneficiary of the digital media revolution. The report is also skeptical that tech companies pose a threat to the agency business. “We remain skeptical that today’s digital media companies such as Google or Microsoft will ever actively compete with agencies… clients generally want some perceived independence from advisors making marketing budget recommendations,” says Weiser.
Weiser’s analysis stresses the importance of media agencies by saying that “…media agencies and related services have been critical to driving organic revenue growth for holding companies.” Global media agencies appear especially well positioned. “The trend among large marketers — whether single-country or multi-national — to using global media agencies is unlikely to abate as long as marketers perceive that they can secure superior media pricing with the global agencies,” reports Weiser.
Most interestingly, the report recommends further consolidation: “We would also suggest that there should be further industry consolidation among Havas, Aegis, Publicis, Interpublic, WPP and Omnicom, it would increase the chances that in any given pitch for new business with clients, the competitive intensity for global accounts would fall and fees would more likely hold up better than they do presently. This would have the impact of increasing margins over longer time horizons.”
The full report is now available on The Makegood (see link below).