FEARS OF AD SPENDING CUTS TAKE TOLL ON AGENCY STOCKS: ANALYSTS SAY ABILITY TO GROW UNDERESTIMATED AS EARNINGS HURT IN GLOBAL CRISIS

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Despite a market rally on Oct. 2, ad agency stocks were left bruised last week, in part because investors fear marketers will slash spending as earnings stumble during the global economic crisis.

While agency stocks had turned in mixed performances during other recent market drops, they were all hit hard by last week's sell-off as the Dow Jones industrial average fell 447.99 points in two days.

DOWNTURN UNAVOIDABLE

"These stocks have held up so well, they were bound to have their comeuppance," said Lauren Fine, analyst with Merrill Lynch & Co. She noted that among the communications and media sectors she covers, the only stocks that were up year-to-date were the top three advertising holding companies-Omnicom Group, Interpublic Group of Cos. and WPP Group-and one newspaper publisher.

The Dow index closed up 152.16 points on Oct. 2, but marketing-related stocks were hard hit for the week. The Advertising Age/Money.com AdMarket 50 index-tracking advertising, marketing and media companies-closed the week down 64.86 points at 1,029.78, a 5.93% drop.

While WPP recovered from two down days to close up on Oct. 2, both Omnicom and Interpublic remained down and other stocks were also hit. Young & Rubicam, New York, closed Oct. 2 at $26.44, down 50 cents, a 1.86% drop and a new low for the company that went public May 15.

TIDAL WAVE HITS ALL HOUSES

Investors are not singling out agency companies in the sell-off wave, said Alan Gottesman, managing director, West End Consulting, a New York investment banking firm.

"When you see a tidal wave, the little houses get washed away along with the big ones," he said.

While there is some concern that marketers will trim budgets because of the world financial crisis, observers said there is a critical difference between this market downturn and earlier ones: namely, that marketers have streamlined their organizations to the point that any future growth in earnings would have to come from sales growth, not cutbacks. Under those circumstances, marketers have to continue spending on existing products and introducing new products.

AGENCIES UNDERESTIMATED

Investors are underestimating agencies' ability to grow from sources other than existing clients, said Ms. Fine. Existing clients account for one-third of the earnings growth among agencies, with acquisitions and new clients accounting for one-third each. If existing clients freeze or cut back expenditures, agencies can still make up the shortage, she said.

"People are going to be surprised by how much they can do on the acquisition side," said Ms. Fine.

Still, there are already signs the economic crisis is impacting ad spending. Dow Jones & Co. said September advertising was off 8%.

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