Publicis: Not-So-Bad 2016 Ahead -- Pivotal Research

Publicis reported companywide growth of 29 on an organic basis during 1Q16 once again substantially above consensus views that were muted given negative considerations constraining the company in recent periods Europe North America and Asia Pacific regions all posted better rates of growth at 34 30 and 38 respectively with Latin America a drag at 31 with Brazil and Mexico down significantly 95 and 146 respectively The quarter will be viewed favorably by investors many of whom were essentially writing Publicis off in recent periodsAmong the factors supporting the quarteramp8217s outperformance was the retention of revenues from clients who have already announced plans to change agencies but who have not yet completed their transitions As well the Sapient business returned to ampgt10 growth during the quarter after a slowdown followed by declines between the end of 2014 and the first part of 2015 As these revenue streams would have represented around 10 of the quarteramp8217s revenue for the whole company this outcome probably added 1 to the companyamp8217s organic growth which we think is illustrative of the potential for Publicis to outperform its peer group over a midterm time horizonManagement indicated that the companyamp8217s relatively new principal trading operation Apex amp8211 which according to a report published in Ad Age yesterday presently employs amp8220about 25 peopleamp8221 and is transacting with traditional and digital media alike amp8211 was not a meaningful contributor to the quarteramp8217s results We note that there is potentially significant upside to reported results in gross revenue terms per employee if not in operating income from such a business if advertisers embrace it Our guess is that Omnicomamp8217s equivalent entity Omnet is probably contributing hundreds of millions of GAAP revenue and possibly significant operating income to that company barely more than two years after that unit began operations The downside risks are that clients come to associate such activities as creating previously underappreciated conflictsofinterest between those of the marketer and the holding companyMuch of the discussion on the earnings call related to efforts to integrate Sapient into the broader organization which the company is clearly focusing on We are strong believers in the role that marketing technology plays in marketing services now and for an extended time horizon into the future thus our coverage of Adobe and Salesforcecom within our coverage universe However the degree to which Publicisamp8217 legacy agencies can crosssell business transformation and marketing technology implementation services amp8211 especially via consulting activities rather than amp8220onlyamp8221 the digital creative and digital media activities that creative and media agencies conventionally sold in recent years amp8211 is not without challenges and remains an important point to monitor If successful Publicisamp8217 business mix is positioned for longerterm outperformance vs its peer group of agency holding companiesIn terms of forwardlooking financial results management indicated it expects the outcomes from last yearamp8217s media reviews to negatively impact the companyamp8217s results in the second and third quarters vs what occurred during the first quarter with a 15 full year headwind for all of 2016 However even with these expectations managementamp8217s 2016 outlook is unchanged amp8211 optimistic but cautious Longerterm financial targets are unchanged Our own operating model is adjusted slightly upwards as we now forecast 26 organic growth vs 21 previouslyWe continue to view Publicis favorably at current levels Post these results we are retaining our price target on Publicis at amp836472 and continue to rate the stock BuyVALUATION At amp836472 our target for Publicis is derived using a 75 nearterm discount rate a 111 longterm discount rate and a 425 long term growth rate Our price target equates to a 15x PE on a 2016 basisRISKS Agency risks relate to blowback from the rebate issue squeezing fees from clients competition from adjacent industries reduced competition between marketers and demand for advertising servicesFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE PUB 41916pdfThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom MyersBizNet Inc management or associated bloggersamp160

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Publicis: Not-So-Bad 2016 Ahead -- Pivotal Research

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Brian Wieser

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Publicis: Not-So-Bad 2016 Ahead -- Pivotal Research

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