Agencies, IT Services and Marketing Tech: Collaboration and Competition -- Pivotal Research

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BOTTOM LINE: Agency holding companies including Interpublic, Omnicom, Publicis and WPP, IT services firms such as IBM, Accenture and Infosys and marketing technology companies such as, Oracle, Adobe and Marketo are increasingly competing and collaborating with one another, as illustrated with several news items from the past week, which we elaborate upon in this note. We don't see outcomes as winner-take-all, but instead see an evolving eco-system with room for each kind of company to evolve as marketers increasingly look for ways to apply more data and technology to their operations.

Our preferred stock among agency holding companies at the present time remains Buy-rated Publicis (price target €64, 23% above Friday's close) where business weakness has been overly punished by investors. Interpublic is also "on sale" with the broader stock market's downturn, as our price target is 14% above where the stock was trading on Friday. We make this upgrade ahead of what we think will be solid 4Q earnings and a favorable outlook for 2016 given recent new business wins and momentum across creative, digital and media agencies alike. Consequently, we are upgrading IPG from Hold to Buy at this time.

Both and Adobe are also Buy-rated. Although we recognize downside risk from investors reducing positions in companies dependent on long-term growth, underlying business conditions are unchanged for these companies, and we think the current market sell-off provides substantially greater opportunity for investors to accumulate positions in both names. We see increasingly favorable underlying business trends at both companies. Our price targets have been modified slightly, with a $105 target at Adobe and $102 price target at (33% and 74%, respectively, above Friday's close)

VALUATION. We value companies on a DCF basis. Key variables driving valuations across the agencies and marketing technology companies we cover (Adobe, Interpublic, Omnicom, Publicis, and WPP) include long-term costs of capital ranging from 11.3%-12.0% (for Adobe on the low end and IPG, OMC and Publicis on the high-end) and long-term growth rates ranging from 3.8% (for IPG) to 9.0% (for CRM).

RISKS. Agency risks relate to squeezing fees from clients, competition from adjacent industries, reduced competition between marketers and demand for advertising services. Key risks Adobe and include the ongoing risk that better software may emerge, the nascent nature of "marketing cloud" businesses, external shocks from partners, reliance on key managers and integration risks associated with acquisitions.


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