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Ads are recovering and Publicis looks cheap

Why the traditional ad giant could thrive in the digital world
May 6, 2021
  • Publicis stands to gain as the advertising market rebounds this year 
  • The group trades at a discount other less digitally enabled peers 
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Signs of recovery in advertising market
  • Acquisition of digital business Epsilon 
  • Cheaper than some ‘big four’ advertising agencies 
  • Decent margins and highly cash generative 
Bear points
  • Growing threat from consulting companies that specialise in marketing and digital transformation 
  • Digital ad market complicated by privacy issues 

Silicon Valley is a land of milk and honey for investors. More good news flowed from the west coast last week: Facebook (US:FB), Apple (US:AAPL), Amazon (US:AMZN) and Google (US:GOOGL) all beat expectations for their first quarter of the year – and all, spare Apple, benefited from a huge uptick in marketing spend online. Facebook’s average price per ad grew by around a third. Google’s operating income more than doubled to $16.4bn (£11.8bn). And Amazon’s lesser known (but huge) advertising business saw its revenues grow by almost three-quarters year on year. The message was clear: ads are coming back with a vengeance. 

This bodes well for big advertisers like Publicis (PUB:FR), even if it is not a digital native. In fact, it is far from it: the company was founded almost a century ago. It still has an agency model, which means that it presides over a number of subsidiaries (such as public relations specialists, ad agencies and production platforms) that often serve competing clients. Publicis, for example, currently works for a number of pharmaceutical companies, including GlaxoSmithKline (GSK), Pfzier (US:PFE) and Novartis (SWX:NOVN). 

That puts it in the so-called ‘big four’ league of advertising agencies, alongside WPP (WPP), Omicom (US:OMC) and Interpublic (US:IPG). At their prime, these companies together wielded huge influence in the media industry, by deciding how and where to spend their clients’ ad budgets.

They still have some of that power – but it has waned as marketing spend has flocked towards online spaces over print adverts and broadcasting. Brands are increasingly cutting back agency fees and buying direct from tech platforms. 

 

Old dog, new tricks

This structural change – accelerated by the pandemic – has spurred a flurry of ‘digital transformation’ strategies from the big four, with many shedding some of their older businesses. But Publicis has for some time now focused on smaller, digitally-agile advertising agencies. Since 2015, the group has taken over more than 20 other companies.

 

 

That has caused Publicis’ net debt to cash profit ratio to wobble somewhat, hitting 2.1 in 2019 after several years of sitting comfortably below 1. It has since recovered to more familiar territory, sitting at 1.3 at the end of its 2020 financial year.

Publicis is also typically very cash generative, with a free cash conversion rate that has exceeded 200 per cent for the past two years. Its operating margin, meanwhile, was a respectable 16 per cent last year despite a 130 basis point drop, which it attributed to the pandemic. 

While its M&A strategy has not been cheap, it has put it ahead of some of its big four rivals. Take WPP chief executive Mark Read, who took the helm after Sir Martin Sorrell’s acrimonious departure in 2018. Read has spent most of his tenure attempting to streamline the group’s sprawling portfolio of agencies. But it was not until late last year, well after pandemic-induced waves of digital spending, that he announced WPP’s new online strategy, which put aside £200m-£400m for acquisitions per year on companies that could bolster digital services.

That kind of budget looks meagre compared with the amounts being spent by Publicis. It forked out a whopping $4.4bn on American tech business Epsilon back in 2019. The takeover gave the group an enviable asset in ad-tech, opening up access to huge volumes of first-party data, ready to be translated into targeted marketing campaigns. The ownership of that data may also offer Publicis some protection from Apple’s new privacy policies, which give iPhone users the option to stop their personal information from being harvested by advertisers. With Google planning to phase out third-party cookies (virtual trackers that record user browsing activity), the Epsilon buy looks like a smart one. 

 

Recovery in ad market 

The division has put the group in good stead to capture the huge growth in online advertising. The sub-sector was valued at $304bn in 2019, according to research firm Mordor Intelligence. It is forecast to reach $983bn by 2025, equivalent to a staggering compound annual growth rate of 21.6 per cent. The pandemic has accelerated consumer adoption of digital shopping habits – and advertisers are scrambling to follow them. 

Such a massive growth opportunity has caught the attention of other businesses, too. Big global consulting firms such as Capgemini (FR:CAP) and Accenture (US:ACN) have squeezed into the market. The latter has acquired a number of key players in the space, including advertising company Droga5 and B2B marketing agency Yesler. 

But even in the digital universe, there is still no escaping the fact that the fate of an advertiser is inextricably linked with the health of the wider economy. So far, an accelerating recovery in the US – where gross domestic product grew by 6.4 per cent on an annualised basis in the first three months of the year – looks promising. Publicis noted that its business in the US returned to positive organic growth of 0.5 per cent in the final quarter of the last year. 

Still, investors should be wary of the multi-speed recoveries that are unfolding across Publicis’ key markets. Uneven vaccine rollouts and varied stimulus packages means that some regions may struggle to rebound this year – early figures point to a double-dip recession in the European Union. An official estimate last week showed that gross domestic product contracted by 0.6 per cent in the first three months of 2021. 

This is a market-wide risk, but we think that Publicis’ heavy exposure to the US will work in its favour. Around 60 per cent of its net revenues are derived from North America, compared with just 35 per cent at WPP. The French group is also not as expensive as WPP on a forward price/earnings basis, as demonstrated in the table below. 

 

NameTIDMMkt capPriceFwd PE (+12mths)Fwd PE (+24mths)Fwd DY (+12mths)DYEV/salesP/BVEBIT marginROCENet debt
PublicisPUB£11,686m4,711p12114.00%4.90%1.51.912.90%9.60%£2,641m
WPPWPP£11,890m981p13123.00%3.00%1.32.5-19.00%-12.90%£2,852m
Interpublic IPG£9,038m2,297p15143.40%4.30%1.84.413.10%13.30%£2,655m
OmnicomOMC£12,782m5,943p14133.40%4.20%1.65.613.30%17.90%£1,396m

 

In short, the ad industry is starting to spring back to life, and Publicis looks relatively cheap given its strong digital foothold and exposure to the US. It is going up against stiff competition, but its Epislon acquisition puts it in a position of strength to deal with the structural changes that are at play in its industry. Management already appears confident that it can rebound this year, having declared a 2020 dividend of €2, slightly below the pre-pandemic level. Publicis is an old and famous name. That matters to chief marketing officers when they choose who to trust with their companies’ reputations. Brands matter to brands. Publicis is a solid one. 

 

Publicis SA (PUB-FR)   
ORD PRICE:5,424ȼMARKET VALUE:€13bn  
TOUCH:5,423-5,425ȼ12-MONTH HIGH:5,566ȼLOW:2,318ȼ
FORWARD DIVIDEND YIELD:3.8%FORWARD PE RATIO:13  
NET ASSET VALUE:2,916ȼ*NET DEBT:41%  
Year to 31 DecTurnover (€bn)Pre-tax profit (€bn)**Earnings per share (ȼ)**Dividend per share (ȼ) 
201810.01.44461212 
201911.01.55502115 
202010.91.37428200 
2021**11.01.46444220 
2022**11.51.60486237 
% change+5+10+9+8 
Beta:1.3    
*Includes intangible assets of €12bn, or 5,036ȼ a share
**Berenberg forecasts, adjusted PTP and EPS figures 
£1=€1.15