2023-09-01 16:12:42 ET
Summary
- Publicis Groupe is a global advertising and communications company, offering a wide range of services.
- Publicis has grown revenue well in the last decade (+8%), owing to continued successful M&A, the development of its services offering (tech and consulting), and continued leading deliverables.
- The advertising industry has come under attack from social media/tech businesses. Although we think Publicis has responded well, we still consider this the biggest risk.
- Publicis performs modestly relative to its peers, although its large scale and expansion into consulting, technology, and AI represent key opportunities.
- The business is currently trading at its fair value, implying no upside.
Investment thesis
Our current investment thesis is:
- We consider Publicis (PUBGY) a leading business within the advertising industry, owing to its vast expertise through a portfolio of quality businesses (such as Saatchi & Saatchi), its exposure to technology, AI, and consulting to support its long-term trajectory and its diversified revenue profile.
- The industry has faced substantial disruption, as the likes of Google (GOOG) (GOOGL) and Meta (META) have taken market share. We continue to be concerned by this.
- Publicis' financial performance is respectable, although the downward trajectory of margins is slightly problematic.
- Although we believe there is an opportunity with Publicis, the business is likely trading at its fair value.
Company description
Publicis Groupe is a global advertising and communications company. It offers a wide range of services, including advertising, media planning, and buying, digital marketing, public relations, and consulting.
Share price
Publicis' share price has underperformed in the last decade, with returns slightly better when considering dividends. This is primarily due to a weakening in financial performance and a change in industry dynamics.
Financial analysis
Publicis financials (Capital IQ)
Presented above is Publicis' financial performance in the last decade.
Revenue & Commercial Factors
Publicis' revenue has grown at a CAGR of 8% in the last 10 years, with only a single period of negative growth (excl. the pandemic). This has been materially supported by M&A, with over €10bn in cash spent during this period.
Business Model
Publicis' business model revolves around providing marketing and communication solutions to clients worldwide. It operates through various agencies, each specializing in different aspects of marketing and communication.
Publicis offers a comprehensive range of communication services, including advertising, digital marketing, media planning and buying, brand strategy, creative services, public relations, data analytics, and consulting. Its integrated approach enables clients to access a full suite of solutions to meet their marketing and communication needs.
Segments (Publicis Groupe)
In any continually developing world, businesses are increasingly seeking integrated solutions and flexible partners from their service providers. This is a key advantage to Publicis compared to its independent peers, allowing its agencies to leverage the strength of the Group.
Publicis is able to drive growth through its many market-leading businesses and agencies. The company owns the historically significant, and industry-leading British Agency Saatchi & Saatchi, as well as Sapient, Publicis, PMX, and Epsilon. Reputation, track record, and scale are material value drivers in the media and communications industry, with Publicis' businesses possessing these factors following a long history of strong performance. Many of these businesses, such as Epsilon, have shown periods of weakness, with Management successfully turning performance around based on strong execution and utilizing the inherent brand strength of the companies.
Publicis has a vast global footprint with a network of agencies and subsidiaries across the world. The company's presence in numerous countries allows it to serve multinational clients while providing localized services tailored to each market's specific needs. This maximizes the value of its brands, allowing for easier entry into new markets alongside intelligent recruitment.
Revenue by geography (Publicis Groupe)
Diversification of Publicis' revenue extends to its client base, with a wide variety of industries serviced, with no substantial exposure. This reduces the risk to the business from a slowdown in demand from a particular segment. Further, this illustrates the company's wide-reaching capabilities.
Revenue by client industry (Publicis Groupe)
Publicis has made strategic acquisitions of digital, technology, and creative companies to expand its capabilities and offer a broader range of services to clients. These acquisitions have allowed the company to stay at the forefront of industry trends and innovation during a period of rapid change. The acquisition of independent agencies is a key characteristic of the industry, with Publicis competing with peers to identify outperforming businesses.
Competitive Positioning
Management is currently positioning the business to exploit the developments in AI to gain market share and improve its resilience against industry cyclicality. The combination of the three brands will be the key driver of this (Consulting + Marketing tech business + AI platform). Management believes development from these brands can drive better real-time outcomes through rapid data analysis, streamlining of processes, and the building of AI solutions for clients, as well as developing its talent to maximize the potential of AI.
Although the outcome of this is yet to be seen, we believe Publicis is uniquely placed in the industry due to its already-developed Marcel business, its exposure to consulting services through Sapient, and its technological capabilities through Epsilon. Its peers are not so well positioned.
AI Expansion (Publicis Groupe)
Publicis places a strong emphasis on creative excellence, leveraging the talent of its creative teams to develop compelling and impactful campaigns. High-quality creativity allows the company to differentiate its services and stand out in a competitive advertising landscape. This is a critical culture as the industry is inherently dependent on the continued creative achievement of its employees.
The rise of digital marketing platforms and self-service advertising options has led some clients to bypass traditional advertising agencies like Publicis, choosing to handle their marketing efforts in-house or through direct partnerships with digital platforms. This is the largest risk the industry has faced, contributing to a slowdown in financial performance and the risk of obsolescence. Google, Meta, and other social media businesses have become the gatekeepers for modern-day marketing and influence, operating in a field they control.
Publicis has been proactive in embracing digital transformation and investing in technology-driven solutions. The problem is that there is no current way to bypass the influence of the businesses named above. Consumers will increasingly use the internet, as they will social media. We continue to be concerned, although do believe Publicis has performed better in response to this than its peers.
Publicis' response will involve the utilization of data analytics (in conjunction with AI) to gain valuable consumer insights and drive data-driven marketing strategies. If the business can offer a value enhancement online and through new media sufficient to justify its cost relative to the standalone/in-house approach, we will see the business return to a strong performance.
Publicis competes with other major advertising and communication companies, including WPP ( WPP ), Omnicom Group ( OMC ), Interpublic Group of Companies ( IPG ), and Dentsu Group ( DNTUF ).
Economic & External Consideration
Publicis, like many companies in the advertising industry, has faced challenges due to adverse market conditions. With high inflation and elevated rates, we are seeing businesses cut back expenditure, both to protect margins and in response to softening demand. If marketing is expected to be less effective, the budget committed will also reduce.
We expect economic conditions to remain difficult in the coming 12-18 months, as inflation is showing itself to be stubborn, particularly in Europe, where Publicis has a strong presence.
Despite these concerns, Publicis continues to perform well. In H1'23, the business generated revenue growth of 7.6%, a respectable level considering the wider environment. What is slightly concerning is that EBITDA and OP growth has not matched this (+3.7% and +7.4%), implying the business has needed to forego margins to maintain this growth trajectory.
Margins
Publicis' margins have trended down in the last decade, with an EBITDA-M of 17% (down -2 ppts) and a NIM of 9% (down -2 ppts).
The gradual decline in margins is a reflection of the decline in the company's (and the industry's) relative competitiveness, forcing negative pricing action in order to maintain its revenue trajectory. Our expectation is for this trend to continue, particularly with inflationary pressures contributing to wage inflation.
Industry analysis
Presented above is a comparison of Publicis's growth and profitability to the average of its industry, as defined by Seeking Alpha (16 companies).
Revenue growth has generally lagged behind the industry average (the 5Y rate reflects the acquisition of Epsilon), as has profitability, reflecting the company's size and maturity. The company's profitability is generally in line with the industry, which is slightly disappointing given its substantially larger scale.
Based on this, we believe Publicis should trade at a discount to its industry average multiple, reflecting its growth weakness.
Valuation
Publicis is currently trading at 9x LTM EBITDA and 7x NTM EBITDA. This is a premium to its historical average on a NTM basis.
Our view is that Publicis should trade at a discount to its historical average, reflecting the increased competition the business has faced, alongside the downward trajectory of its margins.
Furthermore, the company is trading at a 48% discount to its peer group, reflecting the weakness in performance substantially. A degree of this will be somewhat biased by higher growth businesses commanding a much higher multiple.
Given the substantial discount to the peer group, which in itself is separately facing fundamental disruption, we believe the historical average is a better benchmark for valuing the business. Our view is that the 5% discount is not sufficient to reflect the current position of the business and the headwinds it is currently facing.
Final thoughts
Publicis is a strong business, owing to its high market share, deep expertise, a large portfolio of leading clients, and scope for improvement through AI (although we are not putting too much stock into this currently). The advertising industry is facing substantial pressures from the new-age "town halls" that are the social media companies. We do not believe the industry has yet to wholly respond successfully but equally, it is not like the industry will decline to zero. Publicis has done better than most to respond, through expanding its technological and consulting capabilities.
Although Publicis' performance relative to its peers is modest, we do consider it an attractive business, but not at its current price. Its FCF yield has only marginally improved relative to the average, and its NTM FCF/EBITDA discount is not sufficient in our view.
For further details see:
Publicis: Analyzing Challenges In An Uncertain Industry