Art & Commerce: Streetwise

Riding a hot economy, advertising stocks are putting big numbers on the board
The ad business dances to the same rhythm as school. The year starts in early September, rushes to a peak in the weeks just before Christmas, takes a breather before hitting a second high point around Easter, then glides into and through the summer. Come Labor Day, the cycle starts anew.
By that reckoning, the industry has already left the old millennium, or at least the old year. How’d things go? From a stock-market point of view, terrifically. Calculated from Labor Day 1998 to the same milestone last week, each of the eight major-company stocks were up by double-digit (or better) percentages; all but two beat the Dow Jones.
The best performances came from the three companies whose stock prices are set in London. Saatchi & Saatchi more than doubled; WPP Group and Cordiant each rose by around three-quarters. Despite these run-ups, the three stocks still carry lower price/earnings ratios than their U.S. counterparts, making them cheap, statistically.
The two poorest performers–up, but by less than the market–were True North and Grey. True North has a legacy of lagging the group. The company has a relatively small market capitalization, its earnings record is uninspired and it was stuck in a confusing and unhappy relationship with Publicis that investors found easier to ignore than to decipher. With next-generation management now in place, the French connection severed and the prospect of a salubrious business climate for at least the next year, True North, true to its name, may make upward progress.
Grey, technically “public,” does not seek investor sponsorship. Its shares, which rarely trade, are not followed by any of the Wall Street researchers.
Obviously, last year’s strong stock price action enriched shareholders. It also helped the companies. A high stock price makes acquisitions cheaper. It is common for public companies to use stock as acquisition currency. Public companies–the buyers–have shares trading at more than 30 times net income; private-company sellers generally get around 10 times their earnings in deal payments. The earnings, “bought” at 10 are then valued by the market at 30 or better.
Companies that use options to pay executives gain another advantage. Increased stock value can produce real income for an option holder, but no compensation expense for the company. If the stock goes down–it’s been known to happen–the optionee doesn’t lose any money; plus, the options can be repriced at the lower level.
Pre-Labor Day Stock Prices
Company (Change) 1998 1999
Saatchi & Saatchi (138.6%) 8.2 19.6
WPP Group (81.4%) 55.0 99.8
Cordiant (71.8%) 8.9 15.3
Omnicom (60.9%) 46.9 75.5
Interpublic (57.7%) 25.9 40.8
Young & Rubicam (45.8%) 30.2 44.0
DJIA (45.0%) 7,640.3 11,078.5
True North (36.6%) 24.1 32.9
Grey (11.7%) 332.0 371.0
Alan Gottesman is principal of West End Research in New York. He can be reached at westendal