As Sentiment Worsens, Ad Agency Stocks Get Cheaper

STOCK STRATEGIST: Advertising agency stocks have become attractively priced once again

Michael Corty, CFA 1 November, 2011 | 2:48PM
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In our Stock Strategist published in early May we declared it was not the right time to buy ad agency stocks despite their recent stellar financial results. Sure enough, over five months later, with heightened concerns about an economic slowdown, all three stocks--Interpublic Group (IPG), Omnicom (OMC), and WPP Group (WPP)--are trading at lower prices (down 20% on average). To date, there has been little evidence that a material pullback in corporate spending on marketing is imminent. However, the level of growth in 2012 remains an open question as most corporations are in the process of budget planning for next year. We think the stocks are trading at attractive levels now, but they could get even cheaper (and become an even better long-term investment) if the macroeconomic outlook for 2012 turns even more negative in the coming months.

We assume an overall deceleration of ad growth in 2012 and forecast low-single-digit growth for the ad agency firms in 2012, realising our forecast could be equally too optimistic or pessimistic. However, our approach to valuing stocks does not depend on one given year, which is why we have previously recommended these stocks at the same time the near-term outlook appeared bleak.

As we've stated many times, ironically, 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 rapidly declining (and we had 5-star ratings on all three stocks).

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Michael Corty, CFA  Michael Corty, CFA, is an equity analyst with Morningstar.