Publicis: French ad group’s tech acquisitions finally pay off

Advertising agencies should be having a miserable time. Structurally, the shift to digital ads — via the likes of Google — has weighed on top line growth. Cyclically, the agencies should feel the chill early from an expected recession.

An update from Publicis provided a cheerier jingle. The French media giant is growing faster than expected, and is more profitable than ever.

Organic revenue growth in the first quarter was a consensus-beating 7.1 per cent. Full-year sales should touch the top end of its guidance of between 3 and 5 per cent growth. Operating margins for this year should come in between 17.5 and 18 per cent — broadly in line with last year’s peak performance. That beats the mid-teens the group was achieving prior to the digital disruption.

These numbers suggest that Publicis has sorted out its business model — at least until AI-generated ads take off. It is no longer cut out of fees by clients flocking to advertise directly on digital platforms.

The group’s bet on technology has helped, but it has taken time. In 2014 it bought Sapient, which provides Accenture-like IT consultancy services, and five years later Epsilon, a data business. These now contribute a third of revenues, growing at a double digit pace, and enable the group to push back against aforementioned structural headwinds.

That has enabled Publicis to leapfrog UK rival WPP in terms of market capitalisation. It is now worth more than €19bn — two-thirds more than its UK peer. The French group’s share price has outrun those of WPP and US rival Omnicom over the past year.

Publicis hopes that revenues from data-driven businesses are less cyclical. That matters because ad agencies only do as well as their clients’ marketing budgets. So far, these are proving remarkably resilient. Witness L’Oréal, which posted like-for-like sales growth of 13 per cent for the first quarter without margin erosion.

The French agency appears to have found a business model that works. Barclays estimates that this should enable it to achieve between 8 and 9 per cent EPS growth — not a bad advertisement for a stock that’s trading on less than 12 times forward earnings.