Is It a Good Time to Buy Holding Co. Stock?

Diversification Is Helping Ad Groups Weather Economic Turmoil

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NEW YORK (AdAge.com) -- For months now, shrieks of warning that the ad market has been infected by the economic malaise have become routine: Analysts have slashed spending forecasts. Marketers such as General Motors and Procter & Gamble have warned of a new austerity. And media companies have seen their shares take a big hit alongside news of a softening ad market.
Omnicom President-CEO John Wren
Omnicom President-CEO John Wren

But even as ad cutbacks roil TV networks and newspaper publishers, the recession has yet to make a serious dent in the performance of the multinational conglomerates responsible for creating and placing the lion's share of advertising.

While agency groups such as Omnicom, WPP, Interpublic and Publicis would seem to be heavily exposed to an economy that's gone south, they've all managed to keep cool this earnings season. None at this point are close to what you'd call Wall Street darlings, but they are not reaching for a rip cord as the bottom falls out of the ad business. Credit the performance to the companies' success in diversifying into marketing disciplines that aren't dependent on the selling of ad time -- such as digital, customer-relationship management and public relations -- and to heavy investment in international markets that remain fast-growing even in tough times.

Things may be falling apart in a macroeconomic sense, but, somewhat surprisingly, the agency holding companies might be better positioned than their media-selling brethren that are slipping down into the gyre swallowing many ad-supported businesses.

Recession resistance
Not bad when you consider how the holding-company model has been blamed for sucking the creativity and freedom out of the ad business in a quest for margins at all costs while not often enough displaying the advantages of being part of a group. One distinct advantage is shining through in the economic gloom: a sense of recession resistance.

Since the Ad Age/Bloomberg AdMarket 50 hit its all-time high in October, the index has fallen 16.7%. Of the 10 worst performers since that peak, seven were media companies, and the other three were troubled marketers: GM, Sprint Nextel and Ford. So far this year, media stocks have sucked wind, but agencies have done a little better.

Yet Wall Street hasn't battered holding-company stocks as much as media ones, though it also hasn't much endorsed them, something it might reconsider.

In recent earnings calls, the analysts that cover these companies have been trying to sniff out whether the agency owners are seeing big changes in client spending. put it best when he said: "We're not a proxy for broadcast media. So there can be a shift, as we've seen in the quarter, between very measurable marketing services, which are the largest part of our company, vs. what is spent in broadcast or some of the other media areas. So we have seen shifts. We haven't seen reductions to our revenue base."

But it wasn't just the head of the largest holding company that expressed a coolness during troubled times. Even Interpublic, which has been struggling to claw its way out of a host of operational and financial difficulties in recent years, has of late shown improved organic growth and profitability. And its CEO, Michael Roth, told a story similar to Mr. Wren's, saying that some traditional ad spending has been redirected into other marketing services. (Publicis ended up slightly ahead of expectations in terms of organic growth, and WPP will announce its first-half results later this month.)

Limited pullbacks
Perhaps most important, those chiefs said they've yet to see large-scale client pullbacks, and while they're cautious about forecasting future growth, they're not expressing as much worry as you might expect, with the exception of anxiety around two particularly sputtering categories: automotive and financial services. This could all change as the recession deepens, but for right now there's no apparent reason for a panic.

Compare that with the scene set last week by the heavily ad-reliant CBS, which saw TV ad revenue decline 6% because of cuts in auto advertising despite the political advertising dollars pouring in. Viacom, on the other hand, saw ad sales grow slower than expected, 1% domestically and 2% internationally, courtesy of automotive, retail and consumer-goods businesses taking money out of the market. That fell short of predictions of 3% to 4% growth, but, happily for CEO Philippe Dauman, Viacom beat expectations because it has its own sort of diversification. Turns out that sales have been good for things such as video game "Rock Band" and tickets for "Iron Man." You know, content people actually pay to get.

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Contributing: Bradley Johnson
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