‘It looks vulnerable’ – Publicis shares plunge 12% as media agencies struggle

Publicis

Publicis Groupe shares dropped 12% overnight after reporting lower-than-expected results in the third quarter and warning that organic revenue would likely decline. The stark outlook led one analyst to say the French advertising giant now looks “vulnerable”.

Despite assurances earlier in the year that organic revenue would be “broadly stable”, Publicis reported a 2.7% decrease in the quarter and said it would likely be down 2.5% for the year.

It blamed ongoing cuts from predominantly US clients on traditional advertising and the “softer than expected” performance of its media agencies for the shock showing.

It also said the shift at Publicis Sapient to work on full business transformation, rather than digital services, has had a negative impact, particularly in the US where the agency is moving away from project-based work to long-term assignments.

“We have taken the tough but necessary decisions needed to tackle the industry challenges we are facing head-on,” said chief executive Arthur Sadoun.

“We are without a doubt at the hardest part yet of our journey and as is the case with any major structural change, things always get worse before they get better.

“We could have chosen the easy route and taken advantage of the status quo to find small pockets of immediate growth. Instead we are accepting this painful situation in the short-term, to be better prepared for the future.”

‘Publicis looks vulnerable’

Despite bullish talk from Sadoun, Trillium analyst Alex De Groote said the third quarter update was a major warning to investors and has left Publicis looking “vulnerable”.

“The market looks at organic revenue growth as its primary indicator of financial health. This warning is a very negative development for Publicis and, more generally, the traditional holding groups,” he said.

Share prices at rival ad holding companies WPP, Omnicom and Interpublic were down 4.4%, 2.9% and 1.3% respectively in the last 24 hours.

“We expect significant weakness in the Publicis share price as investors now take flight. At 37 Euros, the share price is already at five-year low valuation. Publicis looks vulnerable in our view,” continued De Groote.

Europe and the US were both below expectations, organic growth in the former was down 3.3% largely due to poor performance in the UK and Germany, while the latter suffered a 4.9% fall. Latin America fell by 7.2%.

APAC and The Middle East and Africa regions were bright spots for Publicis, with organic growth up 2.5% and 9% respectively.

Bloomberg analyst Matthew Bloxham said the results show "how little visibility advertising agencies have of their clients’ spending plans, and the vulnerability of a business model heavily skewed to project-based work."

Just five months ago Sadoun boasted of completing the “biggest acquisition that our sector has ever seen” after buying data giant Epsilon for nearly $4bn.

Commenting on the results, Sadoun said Publicis's strengthened data and tech capabilities had “played a critical role” in Q3 account wins, which included new business from Novartis, Mondelez, British Telecom, and LVMH.

Publicis cautioned that it won't know the full benefit of Epsilon's consolidation into the group until the end of the second half of the year. But this will be an anxious wait for investors eager to see how much fruit it bears for the multi-billion dollar price-tag.

“Publicis undertook the expensive Epsilon deal to accelerate its digital and data offering. It remains to be seen if this will deliver on expectations," said De Groote. "However, it has impacted the borrowings of Publicis Groupe. Net debt totalled euro 5,043 million at September 30, 2019. This will be an additional concern for investors."

Tony Walford, partner at Green Square, was a little more optimistic on the outlook. He said that while two consecutive downgrades "isn't great" and will give the market the jitters, Publicis could be in a worse position.

"If it hadn’t bought Epsilon then it wouldn’t have the tech capabilities it does, and you could argue the situation could be worse. The question is how well the revenues anticipated from Epsilon are holding up. We all know the traditional ad models are no longer relevant, but if significant clients aren’t investing in data-driven marketing as expected then this is a different – and potentially more structural - market issue reflecting the global economy and anticipated slower growth," he said,

"Publicis is further down the road in terms of its ‘power of one’ program and some of the other groups are still catching up on their restructuring. At least Sadoun has been open about the issues facing the business, what they are doing to address them, and how long it could take. Either way, investors aren’t going to be pleased to see their portfolios take a hit and I’d expect quite a bit of scrutiny on all the holding groups’ performance going forward. "

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