Lights, Camera, Advertising


By William Donald After three years of sluggish growth, the global advertising and marketing industry is finally turning around. We at Standard & Poor's Equity Research believe the industry appears to be in the early stages of an operating rebound, aided by economic recovery in many key global markets.

We maintain a positive investment outlook on the advertising group. Although the S&P Advertising index has gotten off to a slow start in 2004, down 8.3% year to date through June 18, 2004 vs. a 2.3% rise for the S&P 1500, we expect it to outperform the S&P 1500 in the next 12 months.

GLOBAL REBOUND. Standard & Poor's believes the turnaround in advertising spending is sustainable, as we have a favorable outlook for the U.S. and global economies. Both U.S. GDP and personal-consumption expenditures rose 3.1% in 2003, and our forecasts that 2004 real growth for these categories will be 4.8% and 3.9%, respectively.

Universal McCann, a marketing and advertising agency, which is part of the McCann Worldgroup division of the Interpublic Group of Companies (IPG), predicts worldwide advertising spending will increase 6% in 2004, to $519.4 billion. According to forecasts from research outfit Global Insight, world real GDP is expected to rise 4% in 2004, led by Asia, the Middle East, and North Africa.

Growth in China and Japan is expected to be particularly robust, rising 8.1% and 4.1%, respectively. Japan -- Asia's largest economy -- showed signs of a major turnaround in the first several months of 2004, with exports, business confidence, employment, and private consumption at their best levels in recent history. China's economy, in contrast, is expected to cool in 2004.

DEMANDING ADVERTISERS. Ad spending is rebounding more quickly in the U.S. than in the rest of the world. The leading advertising and marketing groups are recovering primarily because of the improving U.S. economy, where they generate 41% to 57% of their business. Universal McCann expects U.S. growth of 7.3% for 2004, to $263.3 billion, and 6.5% growth in 2005. The U.S. Presidential election and the Summer Olympics in Greece are expected to spur growth in 2004, with television and radio media likely to be the primary beneficiaries. Universal McCann see ad spending outside the U.S. rising 6% for 2004, to $256.1 billion, and 5.5% growth for 2005.

The growth in spending should boost advertising outfits' bottom lines. Standard & Poor's forecasts average earnings-per-share growth of 8% to 9% for advertising outfits in 2004. Although revenue gains are likely to continue at a healthy pace in 2005, profitability is expected to keep on reflecting the effects of advertisers' increasing demand for return on investment and agencies' need to increase spending on new business initiatives.

S&P's top pick among the U.S.-based advertising outfits we follow is Omnicom (OMC

; recent price, $76), which we rank 5

STARS (buy). We believe it will outperform its peers in revenue growth, profitability, and rate of earnings growth over the next three years. We think that Omnicom has an edge over its rivals because of its emphasis on nontraditional marketing and services, which we see enjoying healthier growth than traditional advertising.

Note: William Donald is a Standard & Poor's equity analyst. He is also a registered representative of Standard & Poor's Securities, Inc. (SPSI). He has no affiliation with any company referred to in this article. He has no ownership interest in any company referred to in this article.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report.

Affiliates of SPSI received non-investment banking compensation from Omnicom Inc. during the past 12 months.

As of March 31, 2004, SPIAS/SPSI and their research analysts have recommended 35.58% of issuers with buy ratings, 52.84% with hold ratings and 11.58% with sell ratings. Price charts for all STARS-ranked companies can be found at www.spsecurities.com

Additional information available upon request to Standard & Poor's. Analyst Donald follows stocks of advertising companies for Standard & Poor's Equity Research

S&P's Michelle Normand contributed to this report


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