Deep Dive: Publicis Groupe (PUB, PUBGY)
Cockroach, not dinosaur
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“When times are good, you should advertise, when times are bad you MUST advertise”
- Popular industry adage
Introduction
Publicis Groupe (PUB) is one of the world's largest advertising agencies based in Paris. The company is listed on the Euronext Paris Exchange (PUB) and has a US-listed ADR with the ticker PUBGY (5 shares of ADR = 1 ordinary share).
Publicis Groupe is an industry giant, and many of its operating subsidiaries have created some of the most memorable advertisements of the past decade. Yet, for those not deeply involved in the European markets, the Group might not ring as familiar. That begs the question, what makes Publicis compelling, and why should we pay attention to it now?
PUB is headquartered in France, but it’s not exactly a “European” company. With >62% of its revenues generated in North America, it’s one of the major players in the world's most attractive advertising market. The appeal of the US market lies in its scale, profitability, and relatively favorable data regulations (which we believe is unlikely to change meaningfully going forward)
The company has made several strategic acquisitions over the past ten years that have positioned it with integrated assets across the full spectrum of the marketing value chain. PUB’s business is well split across all the different areas, with about 1/3rd exposed to creative, 1/3rd in Media Buying/Planning and another 1/3rd in hybrid data and information technology consulting. The company is favorably positioned to capture both digital business transformation and IT spending (even as creative spending potentially stagnates).
Publicis enjoys a more robust positioning today relative to previous cycles, as its reorganization and transformation activities from prior years, which we will delve into, have borne fruit. This is reflected in superior margins, growth profile, and market share gains.
The media landscape continues to evolve rapidly, creating complexity and execution challenges for advertisers. Digital advertising now accounts for the majority of global ad spending, underscored by an increasingly fragmented landscape. Search (Google) and social media (Facebook, Instagram, TikTok, Twitter) continues to dominate, but the list is far from over as options exist to advertise on eCommerce platforms (Amazon, Walmart, Kijiji, etc.), and advertising-supported streaming services (Netflix, Peacock, etc.) which are also increasingly common.
Concerns have been raised about the business models of large ad agencies - we believe claims of their demise are greatly exaggerated. A recurring theme in this evolving landscape is its complexity, with advertisers requiring partners to help them navigate efficiently. PUB is well-positioned to help its clients do so, with the strength of its capabilities increasingly becoming evident in its operating results.
In the past year, PUB shares have hit a recent high, driven by advertising spending outpacing expectations and consistent new business wins (which PUB has led the peer group in ~five of the last six years). While shares are up, they still appear attractively valued. Despite concerns around the magnitude and timing of an impending recession, we believe PUB is the best positioned it has ever been to navigate a potential slowdown - thanks to its more robust business mix relative to previous cycles and a new integrated marketing offering which should be less exposed to spending cuts.
PUB trades at a forward P/E of 10.5x and EV/Adjusted EBITDA of 5.9x. Shares yield ~4% and are up 26% YTD. The company’s healthy balance sheet and FCF generation of >$1.7b should allow it to complete share repurchase or opportunistic M&A in the upcoming year.
In this report we will delve into: PUB’s business segments, transformation of the group, competitive dynamics of the advertising industry, a closer look at PUB’s Epsilon acquisition, as well as discussion of risks including generative AI, privacy and data regulations, valuation, and other topics.
Business Segments
Publicis has a long history dating back to 1926 and has survived throughout many different environments due to its ability to adapt. Longtime Publicis executive Rishad Tobaccowala believes that ad agencies “[are] like cockroaches. Everybody hates us. Nobody likes to see us. But cockroaches have outlived everyone. We scurry out of corners.” PUB’s portfolio of businesses spans the entire marketing value chain which we detail below:
