Coronavirus' Economic Impact Will Hurt Ad Holding Firms
We have lowered our fair value estimates of ad holding companies.
|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
We have lowered our fair value estimates of ad holding companies as they face pressure on the top line due to the coronavirus, which is hurting the global economy. Our new WPP (WPP) fair value estimate is now GBX 1,300, down from GBX 1,450. For Publicis (PUB), we lowered the fair value estimate to EUR 56, from EUR 62. We reduced fair value estimates of Omnicom (OMC) and IPG (IPG) to $83 and $25, from $89 and $27, respectively.
The coronavirus continues to spread and is creating further uncertainty about when the spread may plateau in the U.S. and Europe. The fear that COVID-19 has created in consumers likely will lower overall demand and consumption for more than 12 months and will impact top-line growth for many consumer goods and service providers. With such exogenous shock to demand considered, various projections regarding global GDP growth have also been lowered by Morningstar and other organizations such as the Organisation for Economic Co-operation and Development. During these possibly slow growth times, firms are likely to cut costs. Marketing and advertising usually come first, which would pressure growth of ad holding companies’ top lines. On the margin front, we are confident that the ad holding firms can adjust to changes in the global economy given their variable cost models, which allow them to quickly slash headcount and/or tap into temps. For this reason, we have not made significant adjustments to our margin assumptions.
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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.