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Global Equity Research 08 April 2019 Media Advertising 101: A Primer with a Focus on the 2019 Outlook Comprehensive overview of the advertising industry. In this primer, we Media examine macroeconomic trends, the domestic and international markets, and the Alexia S. Quadrani AC major media that participate in this industry. (1-212) 622-1896 [email protected] An analysis of key industry trends, including: the drivers of slower industry Bloomberg JPMA QUADRANI <GO> organic revenue growth, with a review of cyclical and structural factors J.P. Morgan Securities LLC including overcapacity, in-housing, pressure in the FMCG vertical, and impact of consulting firms. We also provide a deeper look the evolving strategies of the David Karnovsky, CFA (1-212) 622-1206 major holding companies in the face significant industry change. [email protected] J.P. Morgan Securities LLC Close look at current macro trends and health of the ad market in 2019. We detail advertising patterns through economic cycles, highlighting how we Zilu Pan expect 2019 to shape up on a global and regional basis. (1-212) 622-6522 [email protected] Detailed examination of the business model of an advertising and J.P. Morgan Securities LLC marketing services company. We discuss the structure of an ad holding Anna Lizzul company, study the growth drivers behind the agencies and other businesses, (1-212) 622-6139 and highlight current trends that influence its outlook. [email protected] J.P. Morgan Securities LLC Company-specific outlooks. We provide pertinent financial information and European Media & Internet investment summaries for five of the top advertising agencies that we cover in Daniel Kerven AC the industry: Interpublic, Omnicom, WPP, Publicis, and Dentsu, including an (44-20) 7134-3057 overview of each company’s business mix and client base. [email protected] Bloomberg JPMA KERVEN <GO> Sentiment remains cautious for agency stocks, but we remain positive on J.P. Morgan Securities plc the long-term outlook for the industry. A slowdown in organic growth over Marcus Diebel the prior two years has left investors cautious on agencies and provided support (44 20) 7742-4447 to bears which attribute the deceleration to structural factors. While we [email protected] acknowledge the holding companies are navigating an environment of J.P. Morgan Securities plc unprecedented change, we do not believe these businesses are broken and that a Internet, Games, Media well-executed offering can still provide substantial value-add to marketers. Haruka Mori AC Furthermore, while creative remains an area under pressure, the full service (81-3) 6736-8632 agencies continue to benefit from strong demand for media, PR, events, and [email protected] other marketing services disciplines. For U.S.-based names, we like IPG and Bloomberg JPMA MORI <GO> OMC, both rated Overweight. In Europe, we prefer WPP (Overweight) to JPMorgan Securities Japan Co., Ltd. Publicis (Neutral) on valuation grounds. In Japan, we rate Dentsu Neutral. See page 106 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com This document is being provided for the exclusive use of [email protected] & clients of J.P. Morgan. {[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected] Table of Contents Executive Summary .................................................................3 The Advertising Market..........................................................12 International Trends...............................................................22 Dissecting Advertising Spending .........................................25 The Advertising and Marketing Services Company ............42 Advertising and Marketing Services Company Growth Drivers .....................................................................................52 Industry Trends ......................................................................57 Compensation Structure........................................................66 Financial Outlook ...................................................................67 Valuation .................................................................................70 Company Profiles...................................................................72 WPP Group (Overweight).......................................................73 Omnicom Group (Overweight) ..............................................78 Interpublic Group (Overweight).............................................83 Publicis Groupe (Neutral) ......................................................88 Dentsu (Neutral)......................................................................93 Appendix I: Billings..............................................................100 Appendix II: Working Capital Changes...............................101 Appendix III: Glossary.........................................................102 2 This document is being provided for the exclusive use of [email protected] & clients of J.P. Morgan. {[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected] Executive Summary Agencies saw modest 2018 was another volatile year for agency holding company stocks. Despite a modest improvement in organic growth improvement in organic growth for the industry, sentiment remained negative in 2018 following two years of sending valuations to their lowest levels in recent years. The challenges for the deceleration industry and bear case which continue to have momentum include: 1) overcapacity and reduced client conflict have provided greater leverage to clients in terms of both pricing and service; 2) marketers are moving more commoditized functions in-house in an effort to lower costs, sometimes with the help of consultants or ad-tech service firms; 3) client verticals such as FMCG remain under pressure, which is translating into a reduced scope of creative work; and 4) holding companies are burdened by underperforming non-core businesses which they are still in the process of divesting. We dig into each of these deeper below; however, we note that even amid this disruptive environment, we've seen significant divergence in organic growth, with some agencies outperforming and even thriving. This demonstrates in our view that the agency model is hardly broken, and that a well-executed offering can continue to provide substantial value-add to marketers. Furthermore, while creative remains an area under clear pressure, full service agencies are benefitting from stronger demand for media, PR, events, and other marketing services disciplines. Table 1: Big 4 Agencies Stock Performance vs. S&P 500 & MSCI Europe Year Big 4 S&P 500 MXEU 2019 YTD -1.4% 12.4% 11.5% 2018 -11.4% -6.2% -13.1% 2017 -17.0% 19.4% 7.3% 2016 9.0% 9.5% -0.5% 2015 7.2% -0.7% 5.5% 2014 2.2% 11.4% 4.1% 2013 53.0% 29.6% 16.4% 2012 21.0% 13.4% 13.4% 2011 -8.6% 0.0% -10.9% Source: Bloomberg. Note: Big 4 is average performance of IPG, OMC, PUB, and WPP. Agency Organic Growth and Margins in 2018 Aggregate holding company organic growth was 1.6% in 2018, accelerating slightly from 1.1% in 2017, though was still below the 3-4% level reached between 2012 and 2016. Supporting agencies was the best year for ad spend (underlying and reported) since the recession. In contrast to 2017, Q4 project work did not disappoint, and the 1.9% industry organic growth in the quarter was the strongest since Q4'16. Also benefitting the holding companies was a pick-up in public relations: WPP reported PR grew organically 2.6% (up from 0.2% in 2017), while OMC grew 1.8% (from 0.3% in 2017). Meanwhile certain CRM disciplines continued to perform well, including healthcare and experiential; highlighting this trend, we saw improvement at IPG’s CMG segment (3.4% in 2018 from -0.4% in 2017) and OMC's Consumer Experience segment (5.9% in 2018 from 0.8% in 2017). And while no holding company breaks out media separately, management commentary continues to suggest this remains an area of strength. 3 This document is being provided for the exclusive use of [email protected] & clients of J.P. Morgan. {[{cHXdtoTfeLkEEGVGoB4nh9uyQlWxaVwiKnbdNIbUNVmrVK4tyNoPDvCrjdRGxR7YGOcgMRymeaA}]} Alexia S. Quadrani Global Equity Research (1-212) 622-1896 08 April 2019 [email protected] Figure 1: Ad Agency Aggregate Organic Growth Historical by Year Figure 2: Ad Agency Aggregate Organic Growth Historical Quarter 7.0% 5.0% 4.7% 6.4% 4.4% 4.5% 5.7% 4.5% 4.2% 6.0% 3.8% 4.0% 3.7% 3.5% 5.0% 4.4% 4.4% 3.0% 2.7% 4.0% 2.4% 3.2% 3.1% 2.5% 2.9% 1.9% 3.0% 2.0% 1.8% 1.8% 1.5% 1.5% 1.2% 2.0% 1.6% 0.9%1.0% 1.1% 1.0% 0.7% 1.0% 0.5% 0.0% 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Company reports and J.P. Morgan estimates. Note: Total includes IPG, OMC, WPP, Source: Company reports and J.P. Morgan estimates. Note: Total includes IPG, OMC, WPP, PUB, HAV, MDCA (from Q1’12; excludes ACCENT), and Dentsu Aegis
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