Mad Men, Sane Stocks

11/10/2010 12:00 pm EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush of MSN Money says that like the hit TV show about advertising in the 1960s, the stocks of ad agencies look set to take off as business improves big time.

In one of the best signs that the recovery is on track, the advertising world's rambunctious "mad men" are back on the prowl.

But however the real-life Don Drapers and Peggy Olsons party these days--and wherever, since they're no longer centralized on Manhattan's Madison Avenue--mad men (and women) have good reason to live it up.

Recently, three industry giants reported very strong third-quarter earnings and revenue growth, building on a decent second quarter, as carmakers, brokerages, and consumer-goods [companies] all spent more to woo consumers.

London advertising giant WPP (Nasdaq: WPPGY) [had its] best quarter in ten years: Revenue picked up 7.5%, building on a 4.7% gain in the second quarter and following a flat first quarter.

US revenue growth was particularly robust at 9.9%. But growth was also impressive in emerging markets (up 7.6%) and even Europe (up 4.7%), which had been all but left for dead by many market pundits.

Two other industry leaders, Omnicom Group (NYSE: OMC) and Interpublic Group of Companies (NYSE: IPG), also recently reported that big account wins in the third quarter drove revenue up 6.7% and 9.4%, respectively.

Strength in the past two quarters has analysts raising estimates for the sector. Brian Wieser, the director of forecasting at Magna Global, a division of Interpublic, recently increased his forecast for 2010 ad spending growth to 2.8% from 2.1%. He expects 3.1% growth next year,…on par with the growth of 3.4% in 2003, coming out of the previous recession.

WPP has hundreds of individual agencies around the world in advertising, brand management, analytics and public relations. It also offers better emerging-markets exposure than Omnicom and Interpublic, Morningstar analyst Larry Witt says, and it plans to continue to grow in these areas through acquisitions. This, however, is also a risk, since the company has overpaid for acquisitions in the past, Witt says.

Omnicom also has hundreds of agencies around the world, many of them considered the best in the business.

Like WPP, Omnicom also plans to expand into emerging markets through acquisitions. Because it has a better track record for not overpaying, there's less of a risk here, says Witt.

Interpublic, the smallest of the international ad and marketing giants listed in the US, remains in the midst of a turnaround following hundreds of ill-conceived acquisitions in the 1990s, says Witt. But it seems to be making progress--cutting costs and winning new business. The company posted 9.4% overall revenue growth in the most recent quarter, including 10% growth in the US and solid double-digit growth in emerging markets. Apparently, more is on the way.

CEO Michael Roth told investors in a recent conference call: "We are back on the path to significantly improved profitability." (WPP closed Tuesday below $60, Omnicon above $46, and Interpublic above $10—Editor.)

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