Tales from the city

Tales from the city

Publicis published its third-quarter turnover results from last Thursday. Reported organic revenue growth for the nine months to September 2002 is -3.7% - below consensus expectations and we are now forecasting organic growth for the full year of -3.4%. However, net new business wins were impressive at E690m, which brings net new billings for the year to September to E1.5 bn.

A statement from the president of the Directoire, Maurice Levy, released with the results was downbeat. He stated: "The expected improvement in the marketplace in Q3 did not materialize. On the contrary, the drop which began in 2001 continued and even accelerated in some countries."

The management reiterated their guidance that visibility remains poor for 2003. I believe this "absence of visibility" means  they have no good news to share with us.

The Interpublic Group also reported its full third-quarter financial results, with net income of $7.5m, or two cents per share, for the three months ended September 30.

Third-quarter results were lower than forecast, due to unanticipated operating costs at McCann-Erickson. Organic revenue declined 5.2% in the third-quarter, compared to 9.1% for the year to date. The operating profit figures were dire at $74m, compared to $135m in the 2001 quarter. This means that operating profit margins have halved to five per cent in the quarter, compared to 10.9% in 2001.

The operating margin was primarily depressed by unanticipated operating costs at McCann-Erickson, Interpublic's largest operating unit, and at Octagon Motor Sports. In addition, lower revenue at Octagon Motor Sports contributed to a second successive quarterly operating loss at that unit. Chief financial officer Sean Orr said: "Results for the third-quarter are unacceptable. We are focused on aligning our cost structure with the current and prospective revenue environment."

The silver lining in these results comes in the form of new business. Interpublic's agencies posted strong new business results in the third-quarter of 2002, with $730.2m of net new business won. Strong new business performance has continued into the fourth-quarter, with significant new or additional assignments from Bank of America, Club Med, Levi Strauss, Novartis, Six Flags, Visa and Burger King.

There is an interesting trend emerging in the third-quarter results across the advertising sector. Most business areas are witnessing continuing decline. Branding consultancy, creative and marketing services are not picking up, while public relations revenues are still in freefall.

But, market research and media planning/buying revenues are relatively healthy, with profits demonstrating resilience to difficult economic conditions. This leads us to prefer Aegis in the advertising sector, as 69% of operating profit is derived from its media planning/buying division Carat, and the rest from its market research division, Synovate. Aegis is not exposed to areas that are suffering in the larger ad groups, so, earnings and the stock price will outperform.

Matthew Marsden, media analyst, Bryan, Garnier & Co Investment Bank

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