EUR 850.00 For Business Accounts Only

Morningstar | Less Traditional Ad Spending by CPGs Is also Hurting Publicis; Lowering FVE to EUR 60. See Updated Analyst Note from 08 Feb 2019

Publicis reported disappointing fourth quarter and 2018 results as similar to its peer, WPP, the firm is facing less spending on traditional advertising from its U.S. consumer packaged goods clients. There was some good news, as while organic growth in net revenue missed all expectations, the firm did continue its margin expansion. We cut our estimates which resulted in a new fair value estimate of EUR 60 for Publicis, lower than our prior EUR 65. Given what appears will be a difficult year, mainly due to weakness in the U.S. and tougher comps, we recommend patience when allocating capital to this narrow moat and now 4-star name.

Fourth quarter net revenue of EUR 2.49 billion was up only 0.4% year over year as it was hurt mainly by a 0.3% organic decline. While Europe and Middle East & Africa generated organic growth of 4.4% and 6.8%, respectively, they were more than offset by declines of 2.6%, 2.8%, and 1.9% in North America, Asia Pacific, and Latin America. Less spending on traditional advertising by consumer packaged goods clients in the U.S. led to the organic decline in North America. Those clients have not yet increased their online ad dollars enough to offset what appears to be near abandonment of traditional advertising for now. However, according to management, this was not the case with its clients in other industries. In fact, lower spending on traditional advertising by clients in other industries was more than offset by the same clients spending more on digital advertising. For this reason, over time, we expect consumer packaged goods firms to behave the same starting in 2020. For the year, net revenue organic growth stood at 0.1%, less than the 0.8% growth seen in 2017. However, with further efficiency from the restructuring which Publicis has been conducting the last few years, operating margin did expand by 60 basis points to 15.3%. We expect Publicis to continue to control expenses, mainly personnel expenses, which may create operating leverage this year despite a decline in gross revenue.

While the fourth-quarter revenue numbers were disappointing, there was some good news. For example, the company has already won the GSK and Fiat Chrysler accounts, each of which have billings of over EUR 1 billion annually. Plus, with other wins like Daimler, Marriott, Campbell’s, and Smuckers, we think organic growth may be positive in the second half of 2019.