Don't Let The Terrorists Win: Here's a Solid Bet on Europe's Future
The horrific ISIS attacks over the weekend have rattled world markets, especially investor faith in the stability of the Eurozone. The attacks have dealt a blow to commerce in Paris in particular and a wide range of Europe-based stocks in general.
However, as always, you should tune out the hyperventilating fear-mongers on cable television. To be sure, the world faces a grave and lasting threat from terrorism, but business will go on -- and that includes the Eurozone, despite its current struggles.
Here's an undervalued bet that Europe and the global economy will not only survive but thrive in 2016: Paris-based advertising firm Publicis Groupe SA (PUBGY) . This giant conglomerate is the best positioned among its peers to profit from a freer spending consumer in developed countries as well as emerging markets.
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Madison Avenue on the Seine
The growing ranks of middle class consumers in emerging markets are increasingly susceptible to Madison Avenue exhortations to open their wallets and shop till they drop.
Except sometimes, the "Mad Men" aren't based in Manhattan -- they're located on the Seine, the river that flows through Paris. Publicis provides a range of advertising and marketing services in Europe, North America, Asia, Latin America, and the Middle East. The company offers traditional and online advertising, online marketing, customer relationship management, direct point of sale marketing, and outdoor display advertising.
Among Publicis' holdings are Bartle Bogle Hegarty, Leo Burnett Worldwide, Saatchi & Saatchi, the Starcom MediaVest Group, and the ZenithOptimedia Group.
Publicis primarily serves clients in luxury consumer goods, automobiles, finance, energy, and leisure. Luxury goods are a particularly lucrative niche right now, as high-end shoppers enjoy greater financial wherewithal.
According to Ad Age, advertising expenditures in emerging markets will account for one third of global spending by the end of 2015, passing the U.S., currently the world's biggest market. By 2017, the "BRIC" nations alone (Brazil, Russia, India and China) will account for nearly 50% of global ad spending.
Publicis and rival Omnicom Group attempted to merge but called off the union in 2014, as negotiations over governance reached an impasse. However, while temporarily embarrassing, the misstep hasn't permanently hurt either company.
Compared to its peers, Publicis is the most aggressive in targeting emerging markets, particularly the BRICs.
With 63,500 employees and a market cap of $12.1 billion, Publicis has been on an acquisition spree to increase its footprint in emerging markets.
As Asia's consumers gain greater affluence and migrate to urban areas, they're increasingly susceptible to advertising -- especially the splashy digital billboards for which Publicis specializes.
The company recently made a $15 million strategic investment in Jana Mobile, the global company that rewards consumer action in emerging markets. This was the first direct investment Publicis made in a mobile technology startup.
Publicis also recently acquired Net@lk, a Chinese social media service provider, as part of the French conglomerate's five-year plan to spend $4 billion purchasing small to mid-sized digital firms in emerging markets over the next five years.
In the developing world, disposable incomes are rising in tandem with consumer sophistication. Emerging markets also have populations that are younger, and hence freer spending, than those in developed countries.
This boom in the global middle class will translate into a huge increase in spending for consumer items -- and by extension, the integrated advertising and marketing campaigns for which Publicis excels.
For the first half of its fiscal 2015, Publicis reported a string of impressive year-over-year increases: revenue rose by 35.3%; operating margin by 35.4%; earnings by 39.6%; and diluted earnings per share by 28.2%.
Digital activities now represent roughly 37% of Publicis' total revenue. When combined with revenue from emerging markets, activity from these high-growth segments generates nearly 60% of the company's total revenue, on track with achieving the company's five-year goal of 75% revenue from these segments.
Publicis stock boasts a trailing 12-month price-to-earnings (P/E) ratio of only about 15.8. The company's comparable New York City-based rivals, Omnicom Group and The Interpublic Group of Companies, sport higher trailing P/Es (16.7 and 18.8 respectively), although neither is as closely tapped into international growth and new ad tech trends as Publicis.
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John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.