Beating the Odds

Investing in advertising stocks 10 years ago required courage. Then, as now, the U.S. economy and others around the world were in a recession. The ad industry, which hadn’t seen a down year since 1970, was tanking. The U.S. was involved in a war in some far-off and scruffy patch of real estate. The general mood then, as now, was grim.

Investors who were able to see beyond those circumstances have been amply rewarded. During the past decade, star-performing stocks such as Omnicom and WPP returned a dollar in capital gains for every dime invested. Others in the category delivered handsome returns as well. Shareholders buying the average agency stock 10 years ago would have more than quintupled their investment. That’s more than twice the gains shown by the Dow Jones industrial average, and almost triple the growth of the Standard & Poor’s 500, a broader gauge of the market.

For this analysis, our theoretical investor bought $1,000 worth of each of the six stocks then available on New Year’s Eve 1991 and held them, taking no further trading action. Some of the stocks, other than an occasional split, are much the same now as they were then. (That is, the companies are constituted essentially the same today as they were 10 years ago.) Others have been subject to mergers—and even a demerger and a “reverse” split. In those instances, we followed the stock’s price along its new path. Also, our comparisons do not take into account any income from dividends.

A 10-year investment in Interpublic Group, measured from point to point, would have been dead money—merely mirroring the market’s performance—although there were numerous opportunities to jump in and out of the stock, making good profits for an investor who could call the turns in price. Grey, which does not trade in much volume and receives no analytic attention from Wall Street, beat the overall market.

Foote, Cone & Belding, which morphed into True North and later sold itself to IPG, underperformed the market by about 25 percent, gaining about 165 percent compared with the Dow’s 216 percent. The “old” Saatchi & Saatchi stock—following the 1986 merger of Saatchi and Bates, and adjusting for the 1997 demerger of the two and Publicis’ subsequent acquisition of the “new” Saatchi—merely doubled, turning in the worst performance of the group.

Ten years ago, some of the advertising industry’s most high-profile players had credibility problems with clients, the press and the Street. The antics of Saatchi & Saatchi, especially—the London-based company and the brothers—did not inspire confidence. (Saatchi shares were trading under $1 as investors tried to make sense of the brothers’ acquisition strategy, among other factors.) WPP, the other British holding company, appeared to be flirting with bankruptcy.

Ad stocks mirrored the market—and each other—through 1992. The U.S. economy remained soft, and the companies’ financial performance was unremarkable. But many of the industry’s holding companies were taking aggressive steps to strengthen themselves. Amid weak business conditions, cost structures were re-examined and expenses trimmed, primarily payroll and overhead. Steps taken in the early ’90s to rationalize costs and enhance profit margins would result in accelerated profit growth for most of these companies in the years to follow. Few investors noticed or predicted this trend.

Investors remained concerned about agency and holding-company balance sheets, which were still laden with debt from the acquisitions of past years. There was also concern about whether the ad business would snap back along with the economy. But it did. The industry, which had declined by 1.4 percent in 1991, grew by 4.1 percent the following year, then tacked on a 5.1 percent gain in 1993.

In hindsight, we can see that 1994 was a pivotal year. That’s when ad stocks, especially Omnicom and WPP, started to outperform the overall market. The rise reflected substantial profit growth at the companies. Operating results were boosted by two elements. The industry experienced accelerated growth, with U.S. advertising surging nearly 9 percent and advertising in the rest of the world growing one percentage point faster. And the recession-born cost controls served to widen margins and fatten profits. The year also brought the industry’s biggest account consolidation to that point when IBM moved its $500 million global ad account, and much of its related marketing services, to one agency, WPP Group’s Ogilvy & Mather. Other marketers followed suit.

If the events of 1994 set the table for ad-sector investors, 1995 served up their first real banquet. CKS Group, a small marketing communications company in the heart of Silicon Valley, had been courting the financial community as assiduously as clients. It showed off the wonders of high-tech computer graphics combined with sophisticated direct-marketing techniques. While there were a number of such outfits competing for business and attention in early 1995, CKS made the first big breakthrough when it attracted a modest investment from IPG. During the 1980s, IPG had been the stock of choice for investors seeking a stake in the ad business. It had developed a strong business model—the multi-agency holding company—and delivered consistently strong financial results. IPG’s stake in CKS was therefore widely viewed as an endorsement of the burgeoning field of interactive marketing. Advertisers, agencies, media companies, even stock-market analysts began to acknowledge that the Internet might be for real.

CKS went public at the end of ’95, selling at $17 a share. Its price doubled within seven trading days. That jump may not seem like much in light of the dot-com frenzy that followed, but it was big news for investors at the time.

Several other events motivated investors to embrace the ad industry. Some of America’s biggest media companies merged in a wave of consolidations: CBS joined Westinghouse, Disney acquired Capital Cities/ABC, and Time Warner went after Turner Broad casting. These mega-deals, plus the continuing consolidation of marketers’ accounts at the big holding companies, was a sure sign that those larger competitors—Omnicom, WPP and IPG—would enjoy significant advantages over the rest.

Judging by financial results, they did. Each of the Big Three reported record-high profits in 1996, with the added benefit of the spending that accompanied national election campaigns. On top of that, the Olympic Games in Atlanta made the usually slow summer TV season atypically strong for the ad business.

Web advertising leaped from an inconsequential—and unmeasured—amount in 1996 to around $600 million in 1997. Some observers thought this new medium would ultimately overshadow established media, sending traditional agencies on a one-way trip to the tar pit to join the other dinosaurs. In fact, the significant investment capital that was flooding into the interactive arena had mostly positive consequences for ad companies. First, stock-market valuations were expanding. A stock’s price ordinarily can be reckoned as the amount of a company’s earnings represented by each outstanding share of stock, multiplied by some number. This number, or price/earnings multiple, is generally a reflection of investors’ attitude toward the company’s prospects—the better the outlook, the higher the multiple. Since the dot-coms had no earnings, there was no rational way to analyze their value. But as more and more investors rushed to get in on the action, stock prices continued to escalate, pushing up the multiples of the market in general.

Another benefit to the holding companies was the dot-coms’ inclination to lavish their investors’ money on advertising in order to stand out in the market. And conventional clients, fearful of being swamped by the digital wave, climbed onto the interactive surfboard. Some hired the dot-com newbies to develop their Web sites. Others looked to their traditional agencies for help.

The result was the best of all possibilities—rising earnings were rewarded by expanding price/earnings multiples.

Ad shares, along with the broader stock market, reached a historic peak in late 1998 and then took a breather. But market conditions improved enough by late in the year for investors to welcome Y&R to the public fold of companies. Investor interest came despite the recent failure of Wells, Rich, Greene—which was one of the first agencies to go public—and the dissolution of Cordiant as Saatchi & Saatchi and Bates demerged.

The dot-com bubble was at its most inflated in 1999. Investors couldn’t chase stocks fast enough. The whole market benefited, including the ad group, with indices reaching peaks that have yet to be surpassed. But the music stopped in early 2000, and many hot digital startups were left without a chair. Companies like Razorfish,, Organic, Modem Media and even the one that started it all, CKS Group, sunk into the low weeds of the stock-price charts, into the arms of acquirers or into oblivion.

The main action in 2000 was on the acquisition front. Stock values declined—though industry revenue and earnings were expanding at a rapid clip. Saatchi & Saatchi succumbed to Publicis, Havas bought Snyder, and WPP scooped up Y&R, to cite notable deals. By year-end it seemed that the U.S. economy might—after the longest ex pansion on record—slide into recession, taking the ad industry with it.

With dot-com advertising gone and clients fearing for their financial well-being, ad volume dropped faster than at any time in memory. Agency earnings came under pressure, and stock-market multiples trended downward. Within the advertising sector, stock prices fell by half or more from the peaks reached in late 1999 and early 2000.

It’s been a wild ride. But through it all, an investor with a little capital and 10 years’ worth of patience would have profited by 477 percent from an across-the-board buy in ad stocks.