EUR 850.00 For Business Accounts Only

Morningstar | PUB Updated Forecasts and Estimates from 08 Jan 2019

Publicis reported better-than-expected third-quarter 2018 net revenue, as organic growth accelerated, driven mainly by new account wins, partially offset by the negative impact of foreign exchange rates. Similar to Omnicom, which reported strong numbers earlier this week, Publicis has begun to again display strength of its brand equity by winning some big accounts with agencies such as Leo Burnett and Saatchi & Saatchi. We continue to view such intangible assets as an economic moat source for this narrow-moat name. Management still expects higher organic net revenue growth and margin expansion this year. We have not made any adjustments to our model and are maintaining our EUR 63 per share fair value estimate. While the strong third-quarter sales figures are pushing Publicis shares 4% higher, we believe they remain attractive, trading at only a 0.86 price/fair value.

We had a few takeaways from Publicis’ third-quarter sales update call that we think support our long-term bullish view on the company. First, it appears that the firm is not seeing consultancies when pitching to very large advertisers, nor is it losing accounts to consultancies. This observation is in line with what we have been saying for the last 12 months. Second, we continue to believe that while focus on technology and data analytics on the part of Publicis and its peers increases, creativity remains the differentiator. On the call, Arthur Sadoun, the firm’s chairman and CEO, said Publicis is "convinced that it’s about connecting creativity, making sure that it’s right through data and working through technology ... the value creativity brings to the mix will always be there and, by the way, will be reinforced in the future.” This strategy appears to be working, as the firm has won some large accounts this year. And third, Publicis is clearly seeing the benefits of its restructuring on the bottom line and with clients that are now working with fewer and much simpler agencies under the ad holding firm. Publicis reiterated its 30- to 50-basis-point margin expansion guidance for 2018.

Regarding the numbers, Publicis posted third-quarter year-over-year net revenue growth of 0.5%, driven by higher organic growth and partially offset by a slight headwind from foreign exchange. Excluding its sales resources provider, Publicis Health Services, which the firm began to divest, Publicis' organic growth came in at 2.2%. Net revenue generated in North America displayed a turnaround, with 1% organic growth, compared with nearly a 1% decline last quarter. This was driven mainly by the 1.3% organic growth Publicis generated in the U.S. as net revenue from account wins such as Nestle came in, and likely will further contribute to growth in the fourth quarter and fiscal 2019. Wins from the first half of 2018 also accelerated organic growth in Europe to 4.2% year over year. Net revenue from other regions, including Asia-Pacific, Latin America, and Middle East and Africa, were up 2.5%, 4.8%, and 1.5%, respectively.

For this year and 2019, we have modeled 1%-plus and 2%-plus organic growth in net revenue, respectively, compared with less than 1% reported in 2017. For the next 10 years, we have assumed a 2% net revenue organic CAGR. Regarding the bottom line, we expect operating margin expansion of 20 basis points (slightly below management’s guidance) in 2018, followed by further expansion of 50 basis points in 2019. We think Publicis can continue widening its operating margin through 2027, resulting in an average operating margin above 16% per year compared with 15.5% in 2017.