Brandes Funds Comments on Publicis

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May 24, 2016

Publicis (XPAR:PUB) is the world’s third-largest global ad agency holding company, with many valuable brands such as Saatchi & Saatchi, Leo Burnett, Razorfish, ZenithOptimedia, and Starcom MediaVest. Publicis has historically been a well-run company with a sound balance sheet and industry-leading margins.

In our view, the business model of ad agencies has attractive economics given their variable cost structure, industry consolidation, and exposure to long-term ad spending and global gross domestic product growth. While the industry as a whole appears to be valued somewhat fully by the market, Publicis has been the recent exception due to concerns over slowing organic growth, a handful of recent account losses and its acquisition of Sapient (its largest acquisition to date), which was seen as expensive.

We believe that excessive short-term pessimism centered on these recent missteps have created an attractive entry point in Publicis’ shares for long-term focused investors. Over the long term, Publicis management has displayed, in our opinion, an admirable track record of profitability, earnings growth, operational execution and mergers & acquisitions integration. We do not view recent client losses and the potential overpayment for Sapient as evidence of permanent structural changes in the business, and we believe Publicis is well positioned to return to levels of growth in line with its peers. Given its strong free-cash-flow generation, we also expect the company will quickly de-lever its balance sheet.

From Brandes International Equity Fund first quarter 2016 commentary.