In 1917, Norman Douglas, a British author and diplomat, wrote, "You can tell the ideals of a nation by its advertisements."
The contemporary world might have altered his view. Last year, global advertising revenue was nearly $450 billion, according to Universal McCann, a division of the Interpublic Group of Companies. Nearly half of that figure was spent in the United States. That's a lot of ideals.
Lauren Rich Fine, an advertising and marketing services analyst at Merrill Lynch, talked last week about the business of advertising. Following are excerpts from the conversation:
Q. Last year, conditions seemed to stabilize for advertising companies. Is the business turning up?
A. If it weren't for the prospect of war, I think that within the next three months to six months we would have a full-blown recovery. In the last six months of 2002, clients did increase media expenditures. Television stations reported double-digit numbers. Radio started to move higher, as did newspapers. The agencies had started to see a pickup. Now, people aren't cutting back, but they are postponing decisions until there is more clarity.
Q. How fast does advertising revenue tend to grow?
A. Over long periods of time, advertising revenue has grown in line with nominal increases in gross domestic product. But it clearly underperformed gross domestic product growth in 2001 and 2002, and we don't know what will happen this year. We think it will come close to nominal G.D.P. growth this year, and in 2004 will slightly outpace G.D.P. growth.
Q. Are the companies in this highly creative, competitive business just plodding along?
A. If an ad agency is gaining market share, it will outpace the cycle. Investors are trying to pick the sweet spot, those that will outpace the market.
Q. The business has consolidated. At the end of 2001, the top 10 ad organizations controlled nearly 70 percent of the global market, compared with almost 30 percent in 1989. Does that limit their ability to grow?
A. Because the companies have gotten so large, it will be harder and harder for them to sustain above-average growth.
Q. So what is the investor profile for these stocks?
A. The investor profile has changed quite a bit. For years, a company like Interpublic was considered a widows-and-orphans stock. Since last summer, it has become more controversial because of the suggestion of accounting irregularities. And Omnicom has a similar cloud over it. As a result of that, the whole group has been painted as more speculative than it was in the past.
Q. The stocks were highfliers back in the late 1990's, when they were riding the technology/dot-com wave. Have the advertising downturn and the worries about accounting turned them into value stocks?
A. Omnicom is currently trading at about an 11 to 12 percent discount to the Standard & Poor's 500 index. For a time in the late 1990's, it was trading at a premium of anywhere from 30 percent to 50 percent, partly due to the dot-com mania.
Q. Are the accounting issues a significant concern?
A. Investors are concerned about what might happen at Interpublic, which is the subject of an investigation by the Securities and Exchange Commission. In my mind there isn't anything to resolve at Omnicom.
Q. Do you recommend any of the stocks?
A. Our analyst in Europe has a buy rating on WPP, which trades American depository receipts in this country.
Otherwise, we like Omnicom and Alliance Data, a marketing services company.
We like Omnicom because they have the best advertising agencies in the world, BBDO, DDB and TBWA. As a result of that, they get to pitch the most new business, they win the most new business and they grow at the fastest rate. So, we like the quality of their assets, their strategic vision and the valuation of the stock, especially given their growth rate.
Alliance Data does private-label transaction processing for companies like Limited and Ann Taylor. I like the fact they have posted really good growth numbers. Their long-term targets are 12 percent revenue growth, 15 percent earnings growth before interest, depreciation and amortization and 18 percent cash earnings per share growth. They have been hitting those numbers.
Q. The Interpublic board of directors demoted the company's chairman and chief executive last week. Would you stay away from the stock?
A. I can't advise anyone to buy Interpublic shares yet. This has been a company under pressure for a couple of years. It is in disarray, and has seen some large clients leave over the last couple of months.
Posted on aef.com: March 5, 2003.
Kenneth N. Gilpin, The New York Times. March 2, 2003
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