Healthy Advertising Market Bodes Well for Ad Holding Companies' Earnings: What to Watch
April 18 2016 - 3:05PM
Dow Jones News
By Nathalie Tadena
Earnings season for the advertising holding companies kicks off
this week, with first-quarter reports due from Omnicom, Publicis
and Interpublic. The world's biggest advertising company, WPP, is
expected to post results next week.
The fresh earnings reports come as the overall advertising
market remains healthy, despite a slowdown in major markets such as
China and Brazil. Publicis-owned ZenithOptimedia is projecting
global ad growth of 4.6% this year with a boost from the U.S.
presidential election, the Summer Olympics and the UEFA European
Championship as well as continued growth in digital ad
spending.
A more complex media landscape means marketers need more
services to help guide their marketing decisions and investments,
which theoretically means more demand for the ad holding companies'
services. At the same time, the advertising giants continue to face
challenges from clients exerting pressure on fees and increased
competition from consulting firm, tech companies and other new
entrants that are encroaching on agencies' turf.
There are some company-specific areas of interest to investors,
including the state of Publicis' companywide restructuring plans,
progress on Omnicom's margin improvement goals and commentary from
WPP on a high-profile lawsuit against the former CEO of its J.
Walter Thompson agency.
Publicis is projected to report roughly flat organic revenue
growth while the other major ad holding companies are expected to
post slightly higher growth rates. Evercore analysts estimate 0.5%
organic growth for Publicis in the first quarter, 3% for WPP, 3.3%
for Omnicom and 3.5% for Interpublic.
Here's the commentary to watch for:
-- UPFRONT SIGNALS
With the television industry's key "upfront" ad sales season
just weeks away, the ad holding companies may provide useful
perspective into the health of the TV ad market and any potential
concerns from clients around digital media, such as measurement and
viewability, that may be encouraging them to spend more on TV. This
year's upfront ad spending commitments could increase 3% to 5%, a
reversal from the declines of years past, based on early estimates
from media buyers and analysts.
Jefferies analysts, in a recent note, said the "ad environment
remains strong" and second-quarter ad growth "continues to look
sequentially similar to 1Q."
-- DIVERSITY INITIATIVES
A recent lawsuit accusing the former CEO of WPP-owned ad agency
J. Walter Thompson of a pattern of racist and sexist behavior has
sparked fierce debate about Madison Avenue's diversity and
inclusion practices. Advertising companies have previously
highlighted diversity initiatives as priorities, but it remains
difficult to gauge the progress made. While the lack of diversity
in an advertising company's ranks may not have tangible effects on
its financial numbers, investors should pay attention to the
possible fallout, said Pivotal Research analyst Brian Wieser.
"This matters to investors now much more than it has in the
past, as marketers appear ready to fire agencies associated with
problematic activities or use such events as a rationale to support
changes," Mr. Wieser wrote in a recent note.
Another talent-related issue that ad holding companies may
address on this quarter's calls is the potential margin impact from
proposed government changes to overtime pay.
-- MEDIA REVIEW GUIDANCE
An unprecedented number of big marketers representing an
estimated $20 billion to $30 billion in media billings put their
media accounts in review last spring. While 2016 has yet to bring
the same volume of media reviews, ad holding companies may weigh in
on what they are seeing on the new business front and from
cost-conscious clients.
"We believe there could be a return of reviews following the
Upfront in 2H as advertisers look to reduce costs," wrote Evercore
analyst Tracy Young in a recent research note.
Pivotal Research's Mr. Wieser said in an interview that the
release of the findings of the Association of National
Advertisers-sponsored investigation into agency transparency issues
that is expected in the coming months "could be a catalyst" for
some more reviews.
Write to Nathalie Tadena at nathalie.tadena@wsj.com
(END) Dow Jones Newswires
April 18, 2016 14:50 ET (18:50 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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