Ad agency holding companies rated, analyzed


WPP is their top pick: Pivotal Research Group analyst Brian Weiser writes in a recent report that they are initiating coverage on global agency holding companies with a BUY rating on IPG and WPP and a HOLD rating on OMC. He adds that investor concern about the threat of disintermediation by the likes of Google is generally unwarranted. “Agencies offer unique services to their clients, namely “service” itself in helping navigate ideas through marketers’ organizations. This competency is not typically developed by media technology companies. While agencies are unlikely to ever see operating margins like those of the media owners given the fragmented and highly competitive nature of the industry, their ability to adapt should not be underestimated.”

Digital media is increasing the importance of agencies and service providers as filters and navigators of ideas. As such, the agency sector is literally a “digital dividend” on the application of technology to marketing. So why is WPP their top pick? “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.

Other holding companies
IPG: We believe 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. Our experience with the company’s senior management gives us conviction about the company’s ability to execute against the goals it has set for itself. Generation of cash flow from improved working capital policies should be a meaningful – and, we believe, underappreciated – source of value as well. However, as the company improves operating margins and reduces perceived risk, investors will look for IPG to produce more international exposure. We have a BUY rating and target price of $13.00 for IPG, or 27% upside.

OMC: 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 and WPP. As a stable bellwether on the sector, investors can still gain low near-term risk-adjusted exposure to agencies through OMC. However, as with IPG the company needs sustained efforts in Asia Pacific and other faster growing markets to out-perform in the long-term. As well, when compared against its best peer example, WPP, the company’s focus on “culture” rather than strategy means that OMC is not as well future-proofed as WPP and thus faces incrementally higher long-term risks. We have a HOLD rating and target price for OMC is $51, or 9% upside.

WPP and Omnicom are far and away the world’s two largest owners of advertising agencies and marketing services companies. In the table below Pivotal notes some of their distinct business units (or more accurately, brands associated with businesses). It’s worth noting that each of the holding companies comprises hundreds of distinct businesses and brands, and as actual revenue figures are difficult to ascertain, our table only highlights a select group of brands with some degree of prominence across the industry.

Industry size for marketing services in the US and globally
Advertising and marketing services agencies generate revenues in excess of $100 billion annually around the world, although the absolute size is dependent upon how the industry is defined. For points of reference, media owners generate approximately $400 billion in advertising revenues globally, according to Magna Global, and closer to $500 billion according to Group M.

GroupM estimates total expenditures incurred by marketers at more than $800 billion annually. The global holding companies (WPP, Omnicom, Publicis, Interpublic and Havas) dominate the marketing services industry, collectively generating nearly $45 billion in revenues. Other large entities such as Dentsu, Hakuhodo, Aegis and MDC Partners represent another ~$7 billion in
annual revenues. 

The rest of the industry is highly fragmented. There are more than 12,000 advertising agencies –including more than 2,000 with more than 10 employees – in the United States alone, according to the US Census Bureau. In China, agency search and selection consultancy R3 estimates that there are more than 143,000 local agencies (but only 202 multinationals).