The global economic downturn has affected nearly every industry, including advertising. While we think ad spending will remain weak in 2009, we anticipate a rebound in 2010. However, it may be too late for investors to play this rebound, as the stocks of most advertising-related companies have appreciated considerably since the market lows of the past year.
According to TNS Media Intelligence, after falling 4.1% in 2008, U.S. advertising fell another 14.3% in the first half of 2009. With the exception of online advertising, every major category (television, newspapers, radio, magazines, outdoor) posted double-digit declines during this period. While media companies that depend on advertising revenue have taken a big hit during this recession, marketing services conglomerates
Omnicom (
OMC),
Interpublic Group (
IPG), and
WPP Group (
WPPGY) have been affected as well. During the first half of 2009, U.S. internal revenue at Omnicom, Interpublic, and WPP declined between 10.1% and 12.3% compared with the overall decline of 14.3% reported by TNS.
While their short-term results are discouraging, we like the marketing conglomerates' competitive positioning. Although most large corporations have internal marketing departments, they still outsource the majority of their marketing needs (ad creation, brand strategy, media buying, public relations, and so on) to specialized agencies because of the complexity and scale of their campaigns. As a result, the large global footprint and broad portfolio of services these firms can offer make it very difficult for smaller rivals to compete for large, integrated marketing campaigns. Additionally, the nature and variety of services performed leads to customer "stickiness," as building relationships with new service providers can be cumbersome. Combined with incremental acquisitions and international exposure, we think marketing services firms will enjoy steady revenue growth over the long run.
In the short term, we expect revenue growth to remain weak. However, despite significant revenue declines in the past two quarters, operating margins have held up fairly well, thanks to a business model with very few fixed costs.
