Publicis is struggling, but it's not a sign of deeper problems with ad agencies, say analysts

Key Points
  • French advertising holding company Publicis Groupe posted poor Q3 results on Thursday. 
  • The results prompted questions about the wider advertising holding company model. 
  • But analysts said Publicis' issues are mostly it's own, not a sign of doom for competitors WPP, IPG and Omnicom. 
Publicis Group CEO Arthur Sadoun
Eric Piermont | AFP | Getty Images

Publicis Groupe, one of the biggest advertising agency holding companies in the world, saw shares drop more than 14% in Europe after cutting its full-year revenue target and posting poor third-quarter results Thursday, almost a week earlier than scheduled.

But despite the many hardships currently facing the traditional advertising industry, analysts say the French company's issues are specific to Publicis, not a harbinger of bad times for agencies overall.

Publicis contains creative shops like Leo Burnett, Saatchi & Saatchi and media agencies like Starcom, and its client base includes giants like Fiat Chrysler Automobiles, Mondelez and LVMH.

It competes against U.S. ad holding companies Interpublic and Omnicom as well as industry giant WPP -- all of which are competing against digital giants like Facebook and Google, as well as management consultancies, which have been encroaching into the agency space. The holding companies have also had to face shifts in the industry from longer "agency-of-record" relationships with clients to more project-based relationships, downward pressure from clients on fees and other challenges.

Publicis has tried to remake itself by investing big in business transformation chops to take on management consultancies, and in data capabilities to take on digital competitors. But it has yet to gain its footing in the new world.

"We are without a doubt at the hardest part yet of our journey and as is the case with any major structural change, things always get worse before they get better," Publicis Groupe CEO and Chairman Arthur Sadoun said in an earnings release statement. "We could have chosen the easy route and taken advantage of the status quo to find small pockets of immediate growth. Instead we are accepting this painful situation in the short-term, to be better prepared for the future."

Despite the headwinds facing all advertising companies, analysts blame the company's bad quarter on the company, not the industry.

"We've seen this movie before, and do not believe that Publicis' poor results necessarily reflect worsening trends for the other agencies," wrote MoffettNathanson analysts. "In fact, we are maintaining our organic growth estimates for WPP, Omnicom and Interpublic for the quarter. Over the past several years, Publicis has struggled through its own company-specific issues with organic growth falling below its peers."

Liberum analysts wrote in a note that Publicis' issues are "mainly" specific to the holding company, including its multi-billion-dollar acquisitions of Sapient and Epsilon, which Liberum says should have fueled organic revenue growth but has resulted in Publicis lagging behind peers, which could suggest those assets "might not be as high-quality as portrayed."

Liberum analysts added that more than a third of Publicis' revenue comes from its top-spending clients, which makes it more volatile to any reduced spend from those clients. Industry-wide issues do exist, but haven't dinged Publicis' competitors as much, they said.

"The problems facing the agencies has been well documented," analysts wrote. "However, Omnicom and Interpublic have continued to show organic revenue growth and the trends for WPP in Q2 were actually better than expected."

Right after stock market open on Friday, IPG was up 2.6%, Omnicom was up 1.8% and WPP in the U.S. was up 2.5%.

But questions about the what a recession might do to the holding companies have swirled. Wells Fargo Securities said in an equity research note Thursday that the recession fears are real.

"The Advertising Services have been hit harder than the rest of media of late and we think recession fears are the reason," they wrote. "These businesses have limited offsets if an ad recession sets in."

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