Double Whammy The publicly owned agency companies, except for a couple of the Brits, have reported their financial results for the first half of 1998; profits are abundant. Results for the second quarter at Interpublic and Omnicom, which are the industry's stock-market standard bearers, showed profits per share up 20 percent and 25 percent, respectively. Is that good? Did your income go up 20 percent since June 1997? Investors are impressed. Stocks in the group pretty much withstood (or recovered from) the market's recent downturns, a sign of strength. With earnings and stock prices at all-time highs, the relationship of stock prices to earnings per share--in investor jargon, the price/earnings ratio--is also high by historical standards. The peak in price/earnings ratios, coupled with record-setting profits, is good news if you bought these stocks a while ago. They rose along with earnings, compounded by the expansion in the P/E, a nice double whammy. Where can they go from here? Further expansion of the P/E is possible, especially if the market overall goes up, but don't count on it. And profit growth rates above 20 percent may not be sustainable. As an analyst might judge, the "easy" profits may have already been made. --Alan Gottesman (westendal pobox.com) is principal of West End Consulting.
THE GOTTESMAN FILE
Price/earnings ratios, an investors' yardstick, are nearing historic highs for ad companies. Here are P/E ratios based on Aug. 13 prices.
Q2 EPS gain 12-month EPS* Recent P/E ratio
Grey 8% 26.24 14.7
Interpublic 20% 2.09 28.1
Omnicom 25% 1.55 34.8
True North 15% 1.24 22.0
Source: West End Research. *12 months through 6/30/98. EPS=earnings per share.
P/E=price/earning