Analysts like JPMorgan break down the risks of the coronavirus to the holding company giants like WPP and Publicis

  • Stocks of the five biggest ad holding companies have dropped 20% to 35% as the coronavirus rattles markets around the world.
  • Analysts said the largest and most heavily leveraged companies, like WPP and Publicis, and those most exposed in Asia, like Dentsu, are most at risk if advertisers cut spending.
  • JPMorgan Chase said IPG could fare better because of its data and healthcare business.
  • Click here for more BI Prime stories.

Top analysts said the coronavirus could further dent the five biggest ad holding companies, already struggling to overcome headwinds to their businesses.

The five companies that represent most of the $600 billion-plus global ad business were already on unsteady financial ground before the virus led to office closures, postponed events and cancelled ad campaigns.

The largest and the most leveraged, WPP and Publicis, and Dentsu, which relies heavily on the Asian market, may face the greatest risks. WPP has a bigger presence in China than any of its rivals except Tokyo-based Dentsu.

JPMorgan Chase said the smallest of the five, IPG, could be more resilient on the strength of its data business, Acxiom, and healthcare clients, which provide 27% of its revenue.

Spokespeople for the holding companies wouldn’t elaborate on previously reported statements from leadership or did not respond to related requests.

The holding companies’ stock prices have been pummeled by coronavirus fears

These companies’s stock prices have dropped 20% to 35% as the coronavirus rattles markets around the world.

Fiona Orford-Williams, senior media analyst at Edison Investment Research, said the stock drops reflect the belief that big advertisers will cut spending until consumers start shopping again.

“We’re planning on the basis of two scenarios,” Orford-Williams told Business Insider. “The first is that things start picking back up in late May or June, and the second is scorched Earth. For the next 10 months, nobody wants to go anywhere or meet anybody.”

While Orford-Williams called the second scenario unlikely, several holding companies have already closed offices due to confirmed or suspected cases of COVID-19 and are testing plans for people to work remotely. 

Plus, IPG and Omnicom are coming off a year of single-digit growth while WPP, Dentsu, and Publicis lost money, and they’re ill-positioned to weather the coronavirus impact, Forrester principal analyst Jay Pattisal said.

WPP and Dentsu have the most to lose in Asia 

The companies most affected will be those with a heavy presence in China and Western Europe and those that rely on travel and events planning, JPMorgan managing director Alexia Quadrani wrote in a March 10 report. The economic uncertainty will increasingly affect the US, where Publicis and WPP were particularly weak last year.

As for China, WPP is more exposed than most other holding companies. China represents about $700 million, or 4% of WPP’s 2019 revenue, CEO Mark Read said on a February 27 earnings call.

China is less than 2% of Omnicom and IPG’s revenue, those companies recently told analysts. Publicis CEO Arthur Sadoun didn’t elaborate on a February call.

Dentsu’s stock has taken the biggest hit so far. It also took the dramatic step of closing its Tokyo headquarters after two employees tested positive for the virus and telling 5,000 employees to work remotely.

As the largest of the holding companies at 130,000 employees, WPP will most likely have the biggest shifts in terms of staff cuts and remote working arrangements. This week, the company began letting employees work from home.

Analysts say the pandemic may help the holding companies get more efficient

Despite all this, analysts predicted most advertisers would keep spending to maintain brand awareness.

JPMorgan’s Quadrani said some advertisers might tap the breaks but would otherwise maintain their 2020 ad budgets. She wrote that she still predicted 2% to 3% 2020 organic revenue growth at Omnicom and IPG.

Analysts also pointed out that agencies are resilient because they can reduce staff quickly or turn to temp workers for some assignments, and Pattisal predicted that, notwithstanding the human cost, having to shift to remote work might help agencies develop a more efficient model in the long-term.

View original article here Source