The global advertising industry was worth $531 billion in 2022 and is forecast to grow at a 13.9% compounded annual growth rate (CAGR) through 2030 to reach an incredible value of $1.5 trillion, according to estimates from Research & Markets. This growth is driven by the increasing trend towards digital advertising and emerging areas such as influencer and connected TV marketing. Given the struggling economy in the U.S., many advertisers have pulled back spending, resulting in lower income for advertisers in the near-term. The good news is, historically this has been a cyclical industry, which leads to opportunities for advertising stocks to become undervalued. Thus, in this article, we will dive into my two favorite advertising stocks.
1. Omnicom
Omnicom Group Inc. (OMC, Financial) is the second-largest advertising agency in the world. The company was founded in 1986 and has since racked up over 5,000 clients in 70 countries. Its business is split into four main service offerings: advertising, public relations, customer relationship management (CRM) and specialist areas.
The company has grown through a combination of organic relationship driven client contacts and acquisitions.
Strong financials
Omnicom reported surprisingly solid financials for the first quarter of 2023, despite being in a cyclical industry. The business reported revenue of $3.44 billion, which increased by just 0.97% year over year, but beat analyst forecasts by $61.5 million. This was a solid result given the current environment.
On a constant currency basis, growth was even stronger with 5.2% organic growth. This was driven by solid results in its media businesses and precision marketing, which grew by 7% year over year.
Its commerce and brand consulting business also rose by 3.3% organically. Experiential marketing has also seen a return in popularity with 8.4% revenue growth in Europe and the Middle East.
Public relations grew by 5.8% year over year, which was especially positive given the tough comparison due to the strong growth in the prior year.
By region, the U.S. reported solid 5.1% growth, but China lagged.
In terms of acquisitions, Omnicom’s TBWA division acquired up and coming U.K. marketing agency Dark Horses in April 2023, for an estimated $5 million. This company specializes in sports marketing and has a variety of big name clients.
Moving on to earnings, Omnicom reported earnings per share (EPS) of $1.56, which beat analyst forecasts by $0.17, and rose by approximately 34% year over year. Operating expenses remained flat year-over-year at $3.1 billion.
In terms of liquidity, Omnicom reported $3.3 billion in cash and short term investments and $6.5 billion in total debt.
Its return on capital and return on equity have both been strong at 24% and 45% respectively. This is a positive sign as it means the business’ investments are paying off, which can be challenging in the ad industry.
Valuation
Omnicom has a price-earnings ratio of 14, which is close to its five-year average. Its enterprise-value-to-Ebit ratio is 11.5.
2. Dentsu
Dentsu Inc. (DNTUF, Financial) is a Japanese advertising agency, one of the largest of its kind in the world. The company does business with almost every major government institute in Japan and makes up around 28% of the national advertising budget.
Its connections to the government are so deep that the New York Times previously referred to the business as the “unofficial communications department” for Japan's political party. From an investor's perspective, this can be considered as a competitive advantage.
Its business model resolves around four main areas: advertising services, marketing communications, digital solutions and creative services.
Cyclical financials
In the first quarter of 2023, the business reported total revenue of $2.3 billion, which declined by 2.83% year over year and missed analyst forecasts by $57.49 million.
This was driven by the aforementioned headwinds from a cyclical decline in the advertising industry.
By region, the company reported 3% growth in the EMEA region, while its home market Japan was flat. The main revenue decline was driven by the Americas region and the Asia Pacific region. Part of the decline in the Americas was perhaps due to a solid 13% growth rate in the prior year.
A positive is that management has capitalized on this tepid environment to hire new CEOs for its India and Southeast Asia markets, in order to accelerate future growth.
In terms of guidance for the full year of 2023, the company expects 1% to 2% organic growth, which has been revised down from the prior 4% estimate.
Dentsu announced its third biggest acquisition ever - it plans to make a $709 million acquisition of U.K. marketing content company Tag. The business has over 2,800 employees and notable clients such as Ralph Lauren, Calvin Klein and New Balance.
Moving on to profitability, Dentsu reported operating income of $223 million in the quarter, which declined by 23% year over year.
Its balance sheet is strong with $3.3 billion in cash and short term investments and $4 billion in debt.
Valuation
Dentsu trades at a price-earnings ratio of 19, which is fairly high relative to Omnicom.
However, the GF Value chart does indicate a fair value of approximately $35 per share, making the stock fairly valued at current levels.
Final thoughts
The advertising industry is going through a cyclical decline in 2023. However, historically, this has been driven by economic conditions, which creates value opportunities. When the good times occur again, exuberance should take over, resulting in an explosion of ad spending. Out of the two major advertising agencies discussed in this post, Omnicom is my ultimate favorite. The main reasons for this are its stable revenues during the past year and its cheaper valuation.
