Publicis Upbeat on 2017, But U.S. Account Losses Could Hit Second Half
French media and communications group Publicis (PUBGY) announced a better-than-expected set of first-half results on Thursday, driven by strong organic revenue growth across key markets in Europe.
However, after losing several major accounts in North America during late 2015 and early 2016, management have warned that the group will begin to feel the pinch in the second half.
"After this particularly active and productive first half year we expect the third quarter to be more difficult due to the full impact of account losses in 2015,"said CEO Maurice Levy.
But he added, "We should not be heavily impacted from the Brexit. Since we operate in the U.K, in local currency, as we do in all the countries in which we have operations. We remain very confident about reaching our 2018 objectives, and believe that we will start to see and feel the benefits of our transformation more fully as of 2017."
The "transformation" involves the consolidation of Publicis' multiple businesses into four divisions.
Publicis in 2014 abandoned an attempt to buy New York-based Omnicom (OMC) - Get Reportand last yearspent $3.4 billion on Sapient.
But in recent months it has been on the defensive.
Starcom Mediavest, one of the North American agencies owned by Publicis, lost its $900 million Walmart (WMT) - Get Report account in February, the latest in a string of knock-backs in the U.S.
Its Walmart account left the building just two months after Publicis lost much of its North American business from Procter & Gamble, (PG) - Get Report , the world's largest advertiser, to Omnicom. It also lost the high profile L'Oreal (LRLCY) account in North America to London's WPP (WPPGY) in December.
The stock shed as much as 15% of its value between December and the end of January, falling to lows of €50.0 ($55).
On Thursday the stock rose by as much as 4% in the European morning to touch highs of €67.00, before paring gains slightly.
In the first-half update, the group announced strong organic revenue growth across Europe, with gains led by Germany and Italy (+9%), France (+5%) and the U.K (+3.6%). Total organic revenue growth in Europe for the first half came in at 5%. For the group as a whole, revenue grew by 2.8%.
The only bleak spot was North America, which accounts for 50% of total sales at Publicis. North American revenue contracted by 0.1% in the second quarter and grew by 1.4% in the first half.
Group first-half operating margin was flat at 13%, while diluted earnings per share grew by 7.7% to €1.81. Jefferies analysts noted that revenue, operating margins and earnings per share were ahead of consensus expectations, with analysts expecting organic revenue growth of 2.2% compared with the 2.8% achieved. Expectations for the operating margin was for 12.9% while analysts had been looking for EPS of €1.79, Jefferies said.
Analysts at Liberum Capital in London believe that account losses, the ongoing restructuring and a sclerotic digital strategy mean that the shares are not worth holding on to. They rate the stock as a sell, with a price target of €55.0, which implies downside of 17.5% from current levels.
Media and communications analysts at Berenberg disagree. They argue that already-low expectations, likely margin benefits from the group's restructuring and strong free-cash-flows underpin a positive outlook for the stock.
Berenberg rates Publicis shares as a hold and has assigned a price target of €71.0 to the stock, which implies upside of 4% from current levels.