The advertising market is hot after a two-year upswing following the recession, and the three ad holding companies in our coverage universe all reported strong high-single-digit top-line growth in the first quarter. We believe it's too late for investors to play this recovery, as Omnicom (OMC), Interpublic (IPG), and WPP Group (WPP) have been on a huge run over the past two years. However, investors should keep these stocks on their radar screen as we think they have sustainable competitive advantages.
While ad growth can fluctuate with the swings in the economy and is therefore difficult to predict, we have a high degree of confidence in our narrow economic moat rating for the global advertising holding companies. We believe they will remain a vital partner for large global corporations over the next decade. Omnicom, Interpublic, and WPP Group each own hundreds of individual agencies around the world focused on specific verticals such as ad creation, brand strategy, media planning, and public relations. These three firms, along with Publicis, garner about 60%-65% of global spending for advertising and marketing services.
A broad service offering allows these holding companies to provide their clients with global, multiplatform, integrated marketing campaigns. Although most large corporations have internal marketing departments, they still outsource the majority of their marketing needs to specialised 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.
Furthermore, we believe the expanding number of advertising choices actually makes it more difficult for companies to manage and allocate their marketing spend and strengthens the relationships between ad agencies and their clients. Most corporations need integrated advertising and marketing campaigns that use multiple mediums. For example, online advertising has become more complex than ever with the number of options growing--search, pre-roll video ads, overlay video ads, display through publishers, ad networks, and ad exchanges, among others. The emergence of Facebook and other social networking websites creates another layer of digital advertising opportunities as well as challenges in how to approach a new audience. Therefore, we believe corporate marketing teams will continue to turn to ad agencies for help in managing the various options available today and in the future.
Perhaps ironically, we believe the most opportune time to invest in the advertising holding companies occurs when the advertising market is weak or in decline, as the market has a habit of extrapolating recent results too far into the future. Between late 2008 and early 2009, the share prices fell to recessionary lows when advertising trends were declining (and we had 5-star ratings on the stocks). Currently, each of the three stocks trades close to our assessment of their fair value (not surprising, as the stocks tend to move in tandem); Interpublic is the most undervalued, with a price/fair value ratio of 0.93.
