Before Nov. 8, the big advertising holding companies faced a straightforward, slow-growth future. The business would continue to evolve, and the agencies would continue to adapt by expanding their capabilities, especially in digital media. But the election cast a blanket of doubt on the prospects for the major players.
"To be clear, there was little uncertainty during the campaign," says Brian Wieser, an analyst at Pivotal Research Group. "Most business observers would not have believed that this outcome was possible. Now there is uncertainty."
Industry watchers are grappling with the implications of Donald Trump's victory for the ad business, which had already absorbed one electoral shock with the vote in June by British citizens to leave the European Union. In their last quarterly reports before the presidential election and the first to fully reflect the U.K. balloting, the big holding companies—Omnicom, Interpublic, WPP, Publicis and Havas—offered a mixed reading on the health of the industry. At one end of the spectrum, Interpublic beat earnings expectations and boosted its outlook for the remainder of the year. At the other, account losses took a toll on Publicis, which reported weaker North American sales.
For the ad industry, the big fear is that buyers will simply put their spending plans on hold while they wait and see how the new administration takes shape. If, for example, Trump follows through on his harsh campaign rhetoric regarding international trade, cross-border business could become more difficult.
"We got so little insight into [Trump's] policies and plans from the campaign," notes Tim Nollen, who follows the ad industry at investment bank Macquarie. "What does that mean for trade relations, the strength of the dollar?"
On the positive side, the Trump administration might turn out to be good for the business. "The early indications [are] that Trump wants to promote infrastructure spending, reduce taxes, ease repatriation of cash—and if we see a rise in interest rates and increased inflation, all those would be good for advertising spending if everything lines up right," Nollen said.
Note the key qualification: "if everything lines up right."
In fact, there are reasons to be bullish about 2017. "I want to use the term 'cautiously optimistic,'" said Tom Eagan, an analyst at Telsey Advisory Group. "It may be overused, but in this instance, it really works." Eagan pointed out that some of the worrisome trends from 2015 did not continue into this year. "Twenty billion dollars in account reviews is not normal, but that didn't continue into '16," he said. "So that's positive."
In addition, the growing complexity of the ad business works in favor of the big companies, which are immense repositories of increasingly necessary expertise. Eagan cites the issue of measuring audience size and reach, where media vehicles such as Facebook, the TV networks and cable providers all use their own metrics. "The idea that you could do this yourself is, to me, just impossible," Eagan said. "The agency has been a way to interpret this Tower of Babel."
Here's a look at what to expect over the next 12 months from the important holding companies:
Share price as of Nov. 30: 17.09 pounds ($21.27)
Market Cap: 22 billion pounds ($27.4 billion)
52-week high/low: 8.75 pounds/12.04 pounds ($23.33/$14.98)
Martin Sorrell, WPP's chief executive, was among the first ad industry leaders to cite Brexit in reporting disappointing results. Sorrell blamed the vote for a slowdown in his company's U.K. business. He may have a tough time making the case. "I don't know if we've seen any concrete evidence that it has hurt ad spending," Nollen said of the vote. In fact, most observers point out that the U.K. won't leave the EU for at least two years, and the contours of that move are still a matter of conjecture. Nonetheless, Sorrell clearly believes he has detected unease among clients, and he has moved to strengthen WPP's businesses on the continent. In addition, the company in late November unveiled a reorganization designed to bolster its GroupM media division. After an investor presentation on the move, Wieser wrote in a report that "WPP remains best-positioned strategically vs. peers and their long-term growth should slightly outperform given the company's business and country mix."
Share price as of Nov. 30: $86.94
Market Cap: $20.54 billion
52-week high/low: $88.79/$66.48
Omnicom CEO John Wren has been among the more vocal ad executives on the affect the U.S. election will have on the industry. In October, when the company reported results that slightly beat Wall Street's expectations, Wren said uncertainty surrounding the campaign, particularly the partisan complexion of Congress, was a drag on the business. He apparently got what he wanted. At a conference a week after the election, Wren said the outcome will help Omnicom because the new administration and the stronger GOP congressional majority are likely to lower corporate taxes. If that plays out as Wren expects, few observers will be surprised. "Omnicom has had a lot of good account wins," Nollen said. Analysts polled by Thomson Reuters mostly have Hold ratings on Omnicom stock, which is trading near its 52-week high. In fact, their median price target for Omnicom is slightly lower at $84. The market may have priced in whatever benefits the company is likely to derive from the election results.
Share price as of Nov. 30: 61.23 euros ($64.95)
Market Cap: 13.82 billion euros ($14.66 billion)
52-week high/low: 69.54 euros/49.95 euros ($73.96/$52.99)
If WPP is in the strongest position heading into 2017, Publicis may be in the weakest. "Publicis has been a loser in accounts and just now cycling through those losses," Nollen noted. Indeed, the company posted the worst numbers among its peers in the third quarter, with organic revenue slumping by 4 percent in its North American business. While that decrease was offset somewhat by gains in Europe, the company still faces a host of questions, including who will be occupying the corner office. Longtime CEO Maurice Levy, 74, has announced plans to step down next year. But observers believe he will continue to play an important leadership role. "Maurice Levy can say he's moving along, but he won't be retiring," Wieser insists. Industry watchers apparently believe the worst is over for Publicis or that new blood, no matter how peripheral, will improve the picture. In a Thomson Reuters survey, a majority of analysts have Outperform or Buy recommendations on the company's shares. And the median price target is 73 euros ($77.43), more than 19 percent above its late-November level.
Share price as of Nov. 30: 5,110 yen ($45.17)
Market Cap: 1.51 trillion yen ($13.35 billion)
52-week high/low: 7,080 yen/4,410 yen ($62.59/$38.98)
Japan's biggest ad company, and one of the country's iconic corporate names, has been wracked by scandal over the past few months. First, Dentsu faced allegations that it charged fees to Toyota, another Japanese icon, and other clients for placements that were never made. Then, more seriously, a 24-year-old employee committed suicide, highlighting a corporate culture that apparently encouraged excessive overtime. But the incidents don't seem to have distracted Dentsu executives, who have pursued an active M&A program, the largest being the $1.5 billion deal for Maryland-based digital marketing firm Merkle. Perhaps because of that ability to focus, Wall Street expects the company to outperform the market, with a consensus price target about 11 percent above its stock's current level.
Share price as of Nov. 30: $24.07
Market Cap: $9.47 billion
52-week high/low: $24.82/$19.79
Less than two years ago, IPG was embroiled in a battle with activist investor Paul Singer's Elliott Management, a fight settled in early 2015 with a reconfigured board. Since then, the company has been "generally solid" in Nollen's view. "The company's performance has spoken for itself." As a result, the threat of another activist campaign is low. In fact, analysts polled by Thomson Reuters mostly have Buy or Outperform ratings on IPG's stock, with a median price target of $26. In a normal environment, the company might rank among the industry's strongest players. The question will be whether the environment settles into something resembling normal.
Share price as of Nov. 30: 7.61 euros ($8.07)
Market Cap: 3.2 billion euros ($3.4 billion)
52-week high/low: 8.07 euros/6.47 euros ($8.56/$6.86)
With the demise of the Omnicom-Publicis megamerger two years ago, the most prominent M&A talk in the advertising industry revolves around Havas and French media company Vivendi. Both Vincent Bollore, who owns 60 percent of Havas, and Vivendi CEO Arnaud de Puyfontaine have suggested publicly that a combination could be in the cards. The two entities are already tied together, with Bollore serving as Vivendi chairman and holding a 20 percent stake in his potential merger partner. Earlier this year, Bollore nominated his son, Yannick, who serves as Havas CEO, to Vivendi's board. And Bollore's investment vehicle has said it plans to boost its voting stake in Vivendi to nearly 30 percent by next spring. Some sort of union is virtually inevitable.
Share price as of Nov. 30: 15,100 won ($12.87)
Market Cap: 1.72 trillion won ($1.46 billion)
52-week high/low: 22,800 won/14,700 won ($19.43/$12.53)
Seoul-based Cheil is another company laboring under the cloud of scandal, in this case a broad influence peddling investigation that has also ensnared parent company (and largest client) Samsung. As the probe plays out, the market will likely focus on Cheil's ownership. In June, the company ended talks to sell a controlling stake to Publicis. Any future deals will likely hinge on the outcome of Samsung's larger restructuring efforts.
Share price as of Nov. 30: $6.20
Market Cap: $338.01 million
52-week high/low: $23.90/$2.74
MDC heads into the new year hobbled by a self-inflicted wound. In November, the company announced it had hired an investment bank for advice on its "financial and capital structure strategy." The move came a little more than a year after CEO Miles Nadal resigned amid an SEC investigation into MDC's finances. The company's public statements since the SEC probe was disclosed have not engendered much confidence. "The news implied that there was a reason for concern that they would not be able to fulfill a media campaign," Wieser suggested. "The lack of specificity was a problem." The problem is likely more troublesome for investors. "The stock pulled back not because of fundamentals but because of equity dilution," Eagan noted. "Capital structure is either debt or equity. They can't add debt because it's already too highly leveraged. So that leaves equity." If the company issues new stock, current shareholders will see their investments diluted. As far as MDC's business is concerned, the company may simply be maturing. "Maybe it's just a normal company now—the years of hypergrowth or high-single-digits growth was not sustainable," Wieser said. "Maybe that was the value that Miles Nadal added to the company."
Scandals and geopolitics aside, as the third quarter drew to a close, the ad industry looked to be in good shape heading into 2017. "The big four—big six if you count Havas and Dentsu—are all doing the same sorts of things, investing in the right areas," Nollen noted. "They are doing the right things to position themselves for future growth."
Industry observers agree, however, that uncertainty is bad for the business and the trend now on both sides of the Atlantic is toward greater upheaval. That doesn't mean 2017 will be a grim year. Everything could indeed line up just right. "The issue is: Can we escape this low-growth world?" Nollen said. "And that seems to be what Trump aims to do."
Article originally appeared on Adweek Advertising & Branding: Link.