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Stock Strategist Industry Reports

Digital Advertising Boosts Ad Agencies' Competitive Position

Three stocks to keep on the radar as we await a better buying opportunity.

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The advertising agency holding companies are well positioned to benefit from the growth of digital marketing over the next five years, and we assign  Omnicom (OMC),  WPP (WPPGY), and  Interpublic Group (IPG) narrow economic moat ratings. The consolidated nature of the industry and high switching costs of severing the agency relationship for clients contribute to a solid competitive position. The emergence of online advertising--once seen as a threat to the ad agencies--is an opportunity for these companies to enhance their competitive position.

Omnicom, WPP, and Interpublic are trading above our current estimates of intrinsic value, which are based on explicit five-year cash flow forecasts and not sensitive to weakness in one year. These stocks can trade lower on company-specific or macroeconomic weakness, though, and we'd gladly recommend them if they dropped to an appropriate margin of safety.

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Michael Corty does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.