Art & Commerce: First Look

The last person to cover the advertising sector at Donaldson, Lufkin & Jenrette got promoted to research director, leaving the stocks in analytic limbo. A couple of weeks ago, however, the New York brokerage firm resumed its coverage of some of these equities when rookie Dave McMurry issued his debut report. He likes most of the stocks right now. Omnicom being his top pick and Interpublic and WPP rating yawns. McMurry makes the case that, despite the generally good performance of the stocks, and notwithstanding the solid financial results posted by most of the companies--and reflected already in their prices--there's more good news in store for investors. First of all, the analyst expects trend-line profit growth of around 15 percent from these companies. Revenue gains will provide a lot of the oomph, but there is also room for profit margins to widen. At the better-run companies, margins could rise above their current all-time-high levels as management learns new ways to be cheap. The large multinationals have the opportunity to exert some leverage over their suppliers, such as airlines, hotels and paper-clip vendors, thus keeping a lid on costs. And since Omnicom, Interpublic and WPP are firmly established around the world, they can add to their operations without having to beef up their global corporate infrastructure. The analyst also sees a payday down the road in terms of productivity. Computers have economized ad creation and many other aspects of the work. In theory, it should take fewer people less time to churn out the product. In an industry in which more than half the revenue coming into a shop goes out through the payroll department, savings here can be (and have been for some of the companies) material. The shift in business away from conventional advertising, which, though still growing, is bringing in a declining share of holding-company revenues, is also a plus factor. Many of the below-the-line disciplines use fewer and lower-paid staffers than advertising. Unless the clients catch on to this and push to lower agency compensation, the shift in business mix will also bolster margins. McMurry thinks the great diversification of the big holding companies--operating in every imaginable discipline and in countries far and near--gives them high resistance, if not immunity, from the recession bug. That, plus the emphasis now being placed by clients on brand support, will help the marketing services industry--and their stocks--avert the ravages of all but a steep economic slide. As to consolidation, the analyst expects all of the global agency networks to be owned by one of four mega holding companies, with Omnicom adding Grey and Interpublic buying Publicis, Burnett and a combined DMB&B and Saatchi. WPP will win Y&R, and True North will line up with Havas and eventually take over Euro RSCG.

Brand Marketing

Art & Commerce: First Look

Alan Gottesman

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Alan Gottesman