For all the presentation skills of Publicis, its pitch to investors has been unpersuasive. A string of dismal results from the world’s third-biggest advertiser has halved its share price over the past two years. Thursday’s better than expected half-year results have finally interrupted that trend, pushing up the share price by 8 per cent. Investors may now be more receptive to its message: a focus on data has equipped it to compete.
As the first big ad agency to report second-quarter results, it is premature to claim Publicis has outperformed. But it has done well in North America, which accounts for nearly two-thirds of sales. Like-for-like second quarter sales dropped only 7.6 per cent, against 19 per cent forecast by analysts.
Boss Arthur Sadoun gives a lot of the credit for new business wins to Epsilon, a digital marketing agency, which it bought for $4.4bn in April last year. He says its data analytics — with profiles of 250m consumers — provides a competitive advantage. The personalised marketing it enables is prized by customers.
The push into digital marketing has been made all the more relevant by the pandemic. Coronavirus has accelerated the shift to ecommerce, paving the way for digital advertising to overtake spending on traditional media this year, according to Group M.
Still, competition is intense. Many specialist agencies and consultancies have encroached on ad company terrain. The likes of Accenture and Capgemini have benefited from the convergence of marketing and business transformation. Disintermediation is also a threat: instead of outsourcing their business to agencies, some clients want direct relationships with tech companies.
Sir Martin Sorrell’s S4 Capital claims to capitalise on that trend with new engagement models. Its shares are up 70 per cent this year, trading on 46 times forward earnings. Those of Capgemini trade on 17 times and Accenture 25 times. Publicis’ shares trail far behind, at eight times forward earnings. They are also less highly valued than peers WPP and Omnicom.
The advertising industry remains under intense pressure. Yet Publicis does not merit such a big valuation discount. Its 2019 equity free cash flow yield is 26 per cent, suggesting it would take just four years to get the value of the company back, says Barclays. That only makes sense if investors expect free cash flow to collapse. The latest results go some way to dispelling that fear.
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