The U.S. advertising industry has been under intense scrutiny since 2016 when a report by the Association of National Advertisers (ANA) revealed existence of rebates and other non-transparent practices in the industry.
Pressure is mounting on media agencies from clients demanding more transparency and reduction in ad fees. Many brands have moved their ad processes in-house. The situation has taken a toll on shares of major industry players.
Recently, Federal prosecutors investigating media-buying practices in the industry reportedly issued subpoenas to advertising companies including Omnicom, Interpublic, Publicis and MDC Partners as part of the probe.
Notably, rebates and bonuses are common business practices in several parts of the world, including Europe, Brazil and China. However, they were not historically parts of deals in the United States and are forbidden under federal antitrust law.
Industry Lags Sector and S&P 500’s Yield
Looking at shareholder returns over the past year, it appears that the ongoing investigation in the industry is keeping investors’ doubtful about its prospects.
The Zacks Advertising And Marketing Industry, a stock group within the broader Zacks Business Services Sector, has underperformed the S&P 500 and its own sector in the past year.
While the stocks in this industry have collectively declined 10.5%, the Zacks S&P 500 Composite and Zacks Business Services Sector have gained 15.2% and 20.8%, respectively.
One-Year Price Performance
Advertising and Marketing Stocks Trading Cheap
Underperformance over the past year has led to a relatively inexpensive valuation.
Comparing the industry to the S&P 500 on the basis of trailing 12-month P/E ratio, we see that the industry’s 19.9 is below the S&P 500’s 20.2. It is well below of the sector’s 28.3.
Price to Earnings Ratio TTM
Comparing the industry to the S&P 500 on the basis of trailing 12-month P/S ratio, we see that the industry’s 1.4 is again below the S&P 500’s 3.5. It is also below of the sector’s 4.6.
Price to Sales Ratio TTM
So any way you cut it, the industry is undervalued.
Earnings Outlook Hints at Continued Underperformance
With the FBI examining media-buying practices including agencies receiving rebates from media outlets, the industry is already under tremendous pressure.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. The earlier valuation discussion shows that market participants have been willing to pay up for these stocks already, potentially limiting further upside from the current levels.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is the industry's earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and its aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $2.55 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Technology Services Industry but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the earnings of $2.55 per share of the industry for 2018 but how this number has evolved recently.
Price and Consensus: Advertising and Marketing Industry
As you can see here, the $2.55 EPS estimate for 2018 is down from $2.82 at the end of March and $2.83 at the end of October 2017. In other words, the sell-side analysts covering the companies in the Zacks Business - Services Industry have been steadily decreasing their estimates.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Weak Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term.
The Zacks Advertising and Marketing industry currently carries a Zacks Industry Rank #206, which places it at the bottom 20% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Long-Term Prospects Also Bleak
While the near-term prospects are obviously bleak, the picture does not appear to be encouraging for the long term as well.
The group’s mean estimate of long-term EPS growth rate is at the current level of 6.4%, lower than that of the Zacks S&P 500 composite’s 9.8%.
Mean Estimate of Long-Term EPS Growth Rate
Furthermore, revenues have remained almost at the same level over the past 15 years.
Revenues: Advertising and Marketing Industry
Industry players are currently under immense pressure and much of their future depends on the outcome of the ongoing investigation on. For them, things have deteriorated drastically over the past two years and may take some more years to look up.
Overall, the industry might not be able to tide over the challenges in the near term and therefore none of the stocks in our advertising and marketing universe currently hold a Zacks Rank #1 (Strong Buy). However, The Interpublic Group of Companies, Inc. (IPG - Free Report) carries a Zacks Rank #2 (Buy). Estimates for the current year and quarter have remained unchanged over the past 60 days.
Price and Consensus: IPG
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
As mentioned throughout, there are a number of reasons to worry about the industry’s performance in the near to long term. So, it would be prudent to stay away from some weak advertising and marketing stocks for now.
Harte Hanks, Inc. (HHS - Free Report) : The Zacks Rank #5 (Strong Sell) stock has lost 29.3% over the past year. The Zacks Consensus Estimate for current-year EPS has declined 18.4% in the past 60 days.
Price and Consensus: HHS
WPP plc (WPP - Free Report) : The Zacks Rank #5 (Sell) stock has lost 19.5% over the past year. The Zacks Consensus Estimate for current-year EPS has declined 5.5% in the past 60 days.
Price and Consensus: WPP
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