A recent report by Zenith Optimedia Group predicts that global ad spending will grow by 4.1 percent in 2011, returning to the pre-recession levels before the start of the recession in 2008.
As an investor trying to think how to benefit, one would try and research the various advertising companies and compare their valuation.
The first names to come to mind are – Omnicom (OMC), WPP (WPPGY), Interpublic Group (IPG) and the French Publicis Group. These four advertising groups are all global companies with operations in the Western economy as well as in emerging countries.
While the growth in North America and Western Europe are at the low single digits (2 percent to 3 percent), other regions like Central and Eastern Europe as well as Latin America have a much higher growth in the mid to high single digits.
Obviously the Middle East and North Africa have a negative growth with a sharp decline for 2011. Other more promising markets are China, which is now number three in the top ten advertising countries (U.S. and Japan still No.1 and No. 2), with Brazil catching up at No. 6.
If one looks at analysts’ mean targets compared to existing share prices for various advertising companies, than Omnicom group has an upside of 11 percent; Publicis Group an upside of 12 percent; Interpublic Group an upside of 20 percent; WPP an upside of 32 percent.
Recently, WPP lifted its outlook for 2011 to over 6 percent revenue growth over an earlier forecast of 5 percent growth. WPP stated that it was cautiously optimistic for 2012 and that they are on target to double the size of their business in high growth economies every five or six years. WPP will surpass $1billon in sales in China and grow rapidly in India.
Publicis Group, the world’s third largest advertising company, is also expanding in emerging markets and digital markets.
Publicis’ most recent takeover is China’s Genedigi Group, making it the country’s largest public relations group.
What we see is advertising companies seeing traditional markets slowing down and they see the way to growth by both investing in emerging markets as well as expanding into digital advertising
Indeed, the Zenith Optimedia report, which also analyzed advertising expenditure by medium, sees the internet continuing to grow at the fastest rate of any other medium — an average of 14 percent a year for the period 2010 to 2013.
Display is growing an astonishing 16 percent a year as people use more online video and social media.
By 2013, Internet will become the world’s second largest advertising medium with a forecast share of 18 percent of spend.
Traditional advertising mediums, like newspapers, are declining whereas magazines are suffering a bit less. Still, both will shrink in future years.
The second fastest-growing medium – and still the largest in number of dollars spent – is television. TV is still growing at about 6 percent a year and will surpass the $200 billion spending by 2012.
Internet advertising expenditure will be around the $82 billion in 2012 and nearly $95 billion by 2013. Although traditional advertising companies are still growing, they will need to expand into digital advertising in order to remain competitive.
If one has a diversified portfolio and wants to participate in this sector, which stock should one consider investing in? Well if one doesn’t have any investment in Google, than one should opt for it.
Google is the world’s fastest-growing advertising company with a forecast revenue growth of 16 percent for 2011/2012 and with a forward PE of 12 is a bit more expensive than WPP (forward PE of 10), which has a lower revenue growth.
With a share priced at $592, it has an upside of about 22 percent if one looks at the average target price by analysts of $724. Second quarter results topped all analysts’ expectations — sales rose to $6.92 billion as opposed to an average analyst estimate of $6.57 billion.
Second quarter profits were $8.74 a share, far exceeding the $7.85 average analysts estimate. Net income gained 36 percent to $2.51 billion or $7.68 a share from $5.71 a share a year earlier.
As Google faces competition from Facebook, it has decided to hire thousands of employees and focus on internal growth rather than takeover other companies (takeovers will probably remain limited due to regulatory issues). Google also has enormous amounts of cash but it isn’t likely that it will pay a dividend in the next two years or so.
International revenues totaled $4.87 billion, representing an impressive 54 percent of total revenues in the second quarter of 2011 compared to 53 percent in the first quarter of 2011. Google is the No. 3 provider of display advertising market in the U.S. behind Yahoo and Facebook and is combating by pushing aggressively into mobile and display advertising.
One recent development which the new CEO Larry Page (the co–founder of Google) introduced is Google-plus, which lets users interact making it more comparable to Facebook. Although Google-plus is in its early stage, more than 10 million users have signed up to it.
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