Ad Shop Publicis Packs a Powerful Punch

04/05/2007 12:00 am EST

Focus:

John Christy

Founding Editor, Forbes International Investment Report

John Christy III, editor of Forbes International Investment Report, says ad giant Publicis may be one of the best positioned of the giant ad agencies to profit from growth in online advertising and emerging markets.

France’s Publicis Groupe (NYSE: PUB) isn’t the world’s biggest advertising firm—that honor belongs to Madison Avenue giant Omnicom Group. But Publicis, the smallest of the Big Four advertising groups, still packs a powerful punch.

Iconic agencies such as Chicago-based Leo Burnett and London’s Saatchi & Saatchi are both part of the Publicis empire, which also includes firms that offer media buying, consulting and public relations, and event sponsorship services.

The company’s revenue grew 6.3% in 2006 to $5.8 billion, and most of the increase was organic. Net income grew 15% and free cash flow rose 14%. Publicis also boosted operating margins from 15.7% to 16.3%—the best in the advertising industry—and slashed its debt load by more than 30%.

Publicis booked net new business of $3.3 billion in 2006. New accounts came from companies including Renault, JC Penney and Sony Ericsson. Thanks in part to the great financial performance, Publicis was able to announce a 39% proposed dividend hike.

Even after the increase, PUB’s payout ratio—the annual dividend divided by earnings per share—will be a modest 24%. This, coupled with strong free cash flow, suggests potential for future dividend increases and/or share buybacks.

More importantly, Publicis has two promising growth initiatives in place that should continue to bear fruit: opportunities in online and digital advertising and an aggressive push into emerging markets.

The potential for digital advertising is enormous. Traditional advertising isn’t dead, but the landscape is clearly changing, and Publicis is taking the right steps to position itself for the future.

The company expects to get 25% of its revenue from digital advertising by 2010. To bolster its expertise in this area, Publicis bought Digitas, an online advertising outfit, for $1.3 billion. Saatchi & Saatchi’s interactive advertising business, which serves clients such as Procter & Gamble and Price Waterhouse Coopers, is another important contributor to the company’s digital initiative.

Publicis is in a number of large and rapidly growing regions, including China, Russia, Turkey and Latin America. Consumer spending is playing a much greater role in these economies and over time that will fuel robust demand for advertising services and expertise.

Publicis expects another 25% of its revenue to come from emerging markets in just three years’ time. The company is also looking at additional acquisitions to boost its competitive position in both digital ads and in emerging markets.

When you consider PUB’s leadership in the industry, its current financial strength and its future growth opportunities, it starts to look like a very cheap stock.

At a recent price near $48, the company is trading at less than 16x estimated 2008 profits. Publicis is targeting a 16.7% operating margin for next year, but even if they fall short of that mark, it still won’t be remotely expensive.

Subscribe to Forbes International Investment Report here…

Related Articles on