Market analysts are backing the upside of the advertising industry following a round of strong March quarter profit results from global holding companies.
Investment banks and ratings agencies see the advertising sector as a leading indicator of the post pandemic economic lift.
Macquarie Bank has upgraded its ratings on Publicis, Omnicom and WPP to outperform, matching Interpublic group (IPG), which showed fast recovery among the advertising holding groups.
The bank’s analysts expect growth to be underpinned by brands seeking consumer dollars as business confidence surges higher.
Analysts at Moody’s have also lifted ratings on the advertising companies. WPP, Omnicom, Publicis and IPG have been moved to stable from negative.
They expect operating performance to continue to improve over the next year as the economy recovers.
“We expect global advertising spend to grow in the range of 6%-8% this year (including cyclical events,” the analysts write in a note to clients.
Ad spending will rebound as business conditions, consumer sentiment and household consumption improve, they say.
In Australia, the SMI (Standard Media Index) is showing growth in media agency bookings after years of decline.
Ad spend grew 2.1% in March and forward bookings show the surge continuing. However, most analysts believe the industry won’t return to 2019 levels until next year.
On a holding company level, Moody’s says IPG has strong creative execution and competitive marketing service product offerings that drive solid cash which remained resilient during the pandemic.
“The stable outlook reflects IPG’s strong operating performance execution, focus on cost management and exposure to client verticals that were less impacted by the global ad spending contraction during the COVID-19 health crisis,” the analysts say.
Moody's changed WPP's outlook to stable from negative after the world’s biggest advertising agency posted better than expected March quarter results
In a note to clients, the analysts say they expect WPP's revenue, less pass through costs, to grow organically by 4% to 5% a year 2021-2022 driven by a “more favourable advertising demand and the company's continued implementation of strategy to restore growth”.
The company's headline operating margins fell to 12.9% in 2020 from 14.4% in 2019, as the impact from COVID-19 was partially offset by strong cost controls.
“We expect the margins to gradually revert to pre-pandemic levels over the 12-24 months, but remain weak compared with industry peers,” says Moody’s.
The analysts say Omnicom Group has a customer-centric business model that delivers strong creative execution, valuable market insight and competitive marketing service product offerings.
“The outlook also reflects our confidence that Omnicom will continue to effectively navigate the muted, albeit improving, ad spending environment, manage operating expenses and return to positive organic revenue growth beginning in Q2 2021 and all of 2021,” the analyst say.
The outlook, according to the holding groups reporting March quarter results:
WPP: "Like-for-like revenue less pass-through costs in the first quarter has been strong and we continue to exercise tight cost control. While these are encouraging trends, there remains continued uncertainty across a number of our markets." WPP is expecting organic growth (defined as like-for-like revenue less pass-through costs growth) of mid-single-digits % and headline operating margin in the range of 13.5-14.%.
Omnicom: says it is positioned for a “very strong recovery” in 2021. The company expects its global business to hit positive organic revenue growth in the second quarter of this year and for the full year 2021. "At the same time, we know that we must continue to monitor the COVID-19 situation and to adapt to any unforeseen challenges that may arise. If 2020 taught us anything it's through expecting unexpected."
IPG: Reported better than expected March quarter results and forecast full year 2021 organic growth of 5% to 6%.“ … we're seeing cautious optimism from clients, and the tone of business has firmed in the last few months. Reopenings, fiscal stimulus and vaccination programs in a number of our largest markets of providing a tangible lift to economic activity and marketing demand.”
Publicis: In the three months to June, the global advertising group expects to recover between 60% to 80% of what it lost in the same quarter of 2020, implying an organic growth between 8% and 10%, However, the company is still cautious, saying the crisis is not over yet. Publcis hasn't released full year revenue guidance for 2021.
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