Despite Recession Fears, Major Ad Agencies Get Upgrade From Wells Fargo
Despite fears of recession deeply impacting the advertising sector, one investment firm is taking the optimist’s view.
On Friday, Wells Fargo analysts upgraded two ad agencies, Interpublic Group of Companies or IPG and the Omnicom Group, to overweight from equal weight. While acknowledging this may be a counterintuitive take, as many see advertising as the first sector hit, the analysts see solid business models at the agencies as well as strong cash flows, as well as the likely possibility of more share buybacks, which could boost the share price and make these companies a solid investment during a potential recessionary period.
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Advertising agencies will still likely see downward trends in marketing spend in paid media and events, the analysts say, as even a less “dramatic” recession will impact consumer spending.
“Our house view is that this recession will look more like ’01 than ’09 or ’20, meaning it won’t have the dramatic world-ending psychology of the GFC and pandemic. But, it should be characterized [by] slower consumer spending and as a result less advertising dollars,” the analysts say.
Other analysts have warned about “storm clouds” developing in the advertising sectors, with top media executives seeing the start of some weakness in their advertising segments.
At Allen & Co’s Sun Valley conference, Bloomberg reported HorizonMedia CEO Bill Koenigsberg said his clients were seeing “flashing yellow warning lights” for ad spending, while IAC CEO Joey Levin said he was also seeing advertisers pulling back.
Unlike previous recessions, the analysts say these ad agencies have more resilient models now and are equipped with more structural revenue than in the past, and that revenue is less cyclical due to greater digital transformation, media buying and performance marketing. Overall, Wells Fargo sees about a 4 percent drop to earnings per share for these companies in 2023, which they say is “far less than what the market has baked in.”
“The biggest risk is the narrative because they’re ‘advertising’, while the opportunity is that they’ll lean more into buybacks and won’t see near the cuts to earnings/EPS that the market is already pricing in,” the note reads.
Radio, however, is a different story.
On Friday, Wells Fargo downgraded iHeartMedia to equal weight from overweight, predicting a 10 percent deceleration in multiplatform growth in 2023, as the analysts foresee a “major reduction in radio spend” during the recession.
iHeartMedia is still expected to grow its digital business, primarily driven by growth in podcasting, however, that segment will likely be impacted by cyclical advertising pressures.
