Morgan Stanley: Ad Stocks Less Attractive

Morgan Stanley has lowered its expectations for ad- industry stock performance in the near term as the top four holding companies prepare to report their second-quarter results.

Morgan Stanley, which previously deemed ad stocks “attractive” compared with the broader market benchmark, now finds them “in line” with other stocks.

Explaining the change in outlook, Morgan Stanley analyst Michael Russell last week cited an “increasingly uncertain economic climate,” which “could reduce new-product introductions and new-win potential even further.”

Separately, Morgan Stanley downgraded its rating of Interpublic Group’s stock—from “overweight” to “equal-weight”—and reaffirmed Omnicom Group’s overweight rating, which means the stock’s total return is expected to exceed the industry average.

Meanwhile, WPP last week was forced to defend itself against criticism over how it accounts for goodwill. In keeping with U.K. standards, WPP values large companies that it acquires (such as Young & Rubicam in 2000) differently than smaller companies. Several U.K. news stories that focused on the issue seemed to have little impact on investors, as WPP’s American Depository Receipts fluctuated only slightly, between $34 and $36 a share. Indeed, in a week characterized by huge swings in the market, the major ad stocks were relatively calm (see chart).

Explaining the reasons for downgrading IPG’s stock rating, Russell said: “Revenue growth appears to be even more murky than we thought.” Omnicom, on the other hand, has been “relatively strong” on the new-business front this year, said Russell. Omnicom and IPG are expected to reveal second-quarter results next week, Publicis Groupe, Aug. 12, and WPP, Aug. 20.