EUR 850.00 For Business Accounts Only

Morningstar | Publicis Reports Better-Than-Expected 1H Results but Lowers Growth Guidance; Maintaining EUR 64 FVE

Publicis beat first-half 2019 consensus expectations on the top and bottom lines, but the firm also lowered its guidance to no organic growth for the year, as it is experiencing lower-than-expected ad spending by consumer-packaged goods companies in the U.S. We were pleasantly surprised by the firm’s ability to continue margin expansion as its reorganization is bearing fruit. We did not make any significant changes to our projections, since we already expected weakness in the U.S. For this reason, we are maintaining our EUR 64 per share fair value estimate on narrow-moat Publicis. We continue to expect some organic ad revenue growth acceleration next year and in 2021, accompanied by further margin expansion due to the Epsilon acquisition. This 4-star name remains attractive, albeit further patience is required. At the current level, the stock’s dividend yield is slightly above 6.5%.

Publicis posted 1.7% first-half 2019 year-over-year net revenue growth, due mainly to a foreign currency tailwind and a return to slight organic growth. Net revenue in Europe, Asia-Pacific, and the Middle East and Africa grew 1.6%, 2.0%, and 19.1%, respectively, while the 3.1% decline in North America net revenue was indicative of continuing weakness in that region. According to Publicis, some of its CPG clients remain conservative when it comes to traditional ad spending. However, some improvement in that market was evident during the second quarter as organic decline slowed a bit sequentially. Net revenue in Latin America declined 7.6% from last year mainly due to deteriorating economic conditions.

Excluding transaction costs associated with the purchase of Epsilon, Publicis’ operating margin improved 60 basis points from last year to 15%. It appears that Publicis’ reorganization, referred to as The Power of One, which integrates, centralizes, and makes various resources more readily accessible for its agencies, has helped improve overall operating efficiency.

Regarding the Epsilon acquisition, which closed in early July, we think Publicis could be better positioned to integrate its clients’ data analytics capabilities with creativity. Publicis may also have attractive cross-selling opportunities in the U.S., where nearly all of Epsilon’s revenue originates, a market in which Publicis continues to underperform. Plus, Epsilon may help Publicis enhance its media services to U.S. clients as its data analytics capabilities allow clients to monitor and adjust campaigns across various channels in real time. WPP’s [m]platform has the same capabilities.

We also believe Publicis’ advertising clients are likely to provide the firm with access to more of their data (or first-party data) given that this deal arms Publicis with another intangible asset, technology. Unlike what Publicis’ Sapient (along with other consulting firms) has been pitching, in our view, the in-house approach of data management does not require complete “business transformation” efforts by clients. In these cases, we believe data analytics tools provided by Epsilon, some of which are software-as-a-service-based, help clients avoid the lengthy and costly technology implementation and integration associated with “business transformation.” Other ad holding firms such as Omnicom and WPP have already invested in similar data analytics technologies.