Advertising and media analyst Brian Wieser has downgraded his stock recommendation for WPP from a buy rating to hold, while doing the opposite for rival Omnicom, which he
has upgraded to buy. Wieser, who is senior research analyst at Pivotal Research, said he was maintaining a buy rating on the Interpublic Group.
All the holding companies are likely to encounter short-term revenue challenges associated with the looming fiscal cliff, Wieser said in reports issued Wednesday morning. He has joined a growing chorus of voices who now believe that a compromise in Washington is unlikely by year's end.
"We believe that a 'grand bargain' lasting beyond 2013 would be necessary to catalyze a resumption of growth in industry-wide advertising
activity during the first half of next year, but that seems increasingly unlikely at this time," Wieser stated. "Consequently, we are reducing near-term revenue expectations for the U.S.-based
segments of the agency holding companies by 0.5% for each of the next three quarters.”"
The WPP downgrade is due largely to Wieser’s changing view of the company’s "long-term growth trajectory" as a result of challenges facing Kantar, the company’s research arm. He also cited what he said would likely be weaker organic revenue growth -- which excludes the impact of acquisitions, dispositions and currency fluctuations -- than previously expected. That weaker growth applies to all the holding companies.
Wieser now projects that WPP’s organic growth next year will be 2.7%. By comparison, Omnicom’s organic growth is expected to be 3.3% next year. For the fourth quarter, WPP's organic growth is expected to be 1.5% compared to Omnicom’s 2.3%
But with WPP’s market research segment Kantar -- second-largest in the industry behind Nielsen -- changes occurring within that sector are likely to prove the most challenging for WPP, Wieser said.
"Marketing research has experienced robust growth in the past, but we expect its pace to continue to decelerate due to secular industry changes,"
he said. "The rising presence of smaller, less expensive providers of research producing custom research services, which once could only have been performed by larger and more expensive providers,
creates deflationary conditions for higher-end marketing research products," of which Kantar is a provider.
"Similarly, at the other end of the industry, online surveys are increasingly replacing telephone-based surveys. This means that marketers may be able to produce more marketing research, even if of lower perceived quality, at significantly lower costs than may have been possible in earlier eras."
The Omnicom upgrade is primarily due to what Wieser called the "widening gap between our more recently established 2013 price target of $56 and current trading levels" ($47.80 as of Thursday morning prior to the opening bell). "Absence of 'drama' or need for operating improvements have long been favorable attributes for Omnicom, and should contribute toward an eventual resumption of positive investor sentiment towards the stock," he concluded.
While maintaining his IPG buy rating, Wieser said he was also revising his price target on the holding company to $14 from $13, which previously resulted from the company’s recent raising of new debt at significantly cheaper rates.
"IPG's stock price is reinforced by expectations of a longer-term turnaround paired with the prospects of being eventually acquired or otherwise participating in further industry consolidation," Wieser stated. That said, the company’s near-term growth will be stunted. Wieser expects the company to post a 1.8% decline in organic revenue for the fourth quarter while posting growth of 1.3% in 2013.