July 30, 2013 Zachary Hughes

Digital Advertising Boosts Ad Agencies’ Competitive Position

Digital Advertising Boosts Ad Agencies’ Competitive Position

From Seeking Alpha

By Michael Corty, CFA

The advertising agency holding companies are well positioned to benefit from the growth of digital marketing over the next five years, and we assign Omnicom (OMC), WPP (WPPGY), and Interpublic Group (IPG) narrow economic moat ratings. The consolidated nature of the industry and high switching costs of severing the agency relationship for clients contribute to a solid competitive position. The emergence of online advertising–once seen as a threat to the ad agencies–is an opportunity for these companies to enhance their competitive position. Omnicom, WPP and Interpublic are trading above our current estimates of intrinsic value, which are based on explicit five-year cash flow forecasts and not sensitive to weakness in one year. These stocks can trade lower on company-specific or macroeconomic weakness, though, and we’d gladly recommend them if they dropped to an appropriate margin of safety.

Advertising Agency Industry Has Consolidated

Following significant merger and acquisition activity from 1990 to 2005, the ad agency industry has become fairly consolidated; we estimate the top five global holding companies now have a combined global market share of around 70%. Lead global agencies (such as WPP’s Young & Rubicam) are independently managed and offer a broad array of marketing services to clients. Additionally, hundreds of smaller agencies within WPP are focused on a particular geographic or niche area of expertise (for example, mobile marketing); they work independently but can be called upon by any of the lead agencies when it serves a client need. read more at Seeking Alpha


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