An improved advertising market was evident in the second-quarter results of media companies in our coverage universe. Media firms are benefiting from corporations increasing their marketing efforts, with Proctor & Gamble as one high-profile example in the recent quarter. However, the rebound in advertising is not benefiting all advertising-dependent companies equally, as the secular shift in media consumption from print to online benefits companies like Google at the expense of newspaper and magazine publishers. Even the newspaper segment at the New York Times has shown sequential improvement, but the secular headwinds facing newspaper publishers have kept ad growth rates from turning positive. We continue to think firms with exposure to online advertising and cable networks will take a greater share of the overall advertising pie in the long run.
While ad growth rates vary by media sector, we think the results of marketing conglomerates like Omnicom, Interpublic, and WPP are a good barometer of broad-based spending on marketing services, as these firms provide a wide variety of marketing services around the globe. During a second-quarter earning call, Omnicom CEO John Wren commented, "We continue to see evidence of a recovery in the US and saw fairly strong revenue growth in the last quarter. As a result we're optimistic about the next few quarters but still remain cautious until the unemployment picture here markedly starts to improve." All three marketing conglomerates reported accelerating revenue growth, but the second quarter of 2009 was the worst quarter for all these companies during the recession. As a result, we think year-over-year ad growth rates may be near its peak, as year-over-year comps become more difficult in the back half of the year, especially in the fourth quarter.
Competitive Positions of Ad Agency Conglomerates Remain Intact
We recognise the media landscape is constantly evolving. However, the competitive positions of the ad agency conglomerates remain intact. While most large corporations have internal marketing departments, they still outsource the majority of their marketing needs (ad creation, brand strategy, media buying, public relations, etc.) to specialised agencies. These agencies often become highly integrated with their clients' operations, making it difficult for clients to switch to alternative providers. For example, WPP's average length of relationship with its top 10 clients is 50 years. Additionally, these conglomerates can provide their clients with global, multiplatform, integrated marketing campaigns. In 2009 Omnicom's top 100 clients were served by an average of 45 of Omnicom's individual agencies. Smaller, independent agencies cannot offer this, due to their focus on specific marketing disciplines, and narrow geographic focus.
As online advertising--especially Google's paid search platform--exploded onto the scene during the prior decade, many felt that the ad agencies would become disintermediated due to the availability of self-service advertising platforms. This speculation intensified as Google developed products to sell ad inventory for newspapers, radio, and television. All along, we've believed the breadth of services provided to--and depth of the relationships with--clients made these companies hard to replace. We were slightly vindicated when Google shut down its print and radio ad business. However, the recession in 2008 also cast doubts about the future of ad agencies, with naysayers fearing that companies would demand lower prices or bring more services in house, and away from the ad agencies.
However, as shown in the above table, revenue growth at the marketing conglomerates has rebounded along with the overall advertising market. This confirms our thesis that these companies play an important and indispensable role for marketers within companies. Additionally, we expect online advertising--especially search advertising--to gain market share. Online advertising has become more complex than ever with the number of options growing--search, pre-roll video ads, overlay video ads, display through publishers, ad networks, and ad exchanges, among others. Therefore, corporate marketing teams are turning to outside ad agencies for assistance. Google has recognised this trend as well: Last April, Google announced a new technology solution that allows ad agencies to interact directly with its search platform.
Between late 2008 and early 2009, the stock prices of marketing conglomerate stocks such as Omnicom, Interpublic, and WPP fell to recessionary lows when advertising trends were declining (and we had 5-star ratings on the stocks). Since then, as the ad environment has improved, the stocks have rebounded significantly. We currently think shares of Omnicom and Interpublic are slightly undervalued, at a price/fair value ratios of 0.88 and 0.91, respectively, and WPP is currently trading near our fair value estimate.
