The bombed out advertising sector is at last emerging from the dismal recessionary battering that has pummelled profits and swiped millions of pounds of company valuations.

MeerketThat’s the underlying theme of latest global advertising estimates produced by Carat, the media consultancy owned by London-listed Aegis. It recently upped its forecasts for worldwide ad spend this year from one per cent growth to 2.9 per cent, rising to four per cent in 2011, thanks to the gradual return of business and economic confidence.

This echoes similar growth forecasts put out by media investment firm GroupM, part of WPP’s vast media empire, in December. Adam Smith, futures director at GroupM, says “confidence seems to be improving, though based on anecdotes rather than substance.”

Over the past few weeks there has been a relative deluge of comment from the four corners of the advertising spectrum. The unveiling of full year figures by a number of media industry companies, including WPP, Aegis, Chime Communications and Cello, to name just a handful, has also put 2010 prospects under the spotlight, where cautionary optimism has been a recurring theme.

Aegis chairman John Napier says that the succession of new business wins during late 2009 had continued into January and February. Aegis sealed $2.7bn worth of new business last year, three-times the $900m won in 2008. Elsewhere, industry heavyweight Sir Martin Sorrell, the founder of WPP, the world’s largest advertising group, made similarly progressive noises at the beginning of March, raising hopes for “a more stable year” in 2010, after calling 2009 a “brutal year.” WPP saw 2009 revenues increase by five per cent, after stripping out currency fluctuations, yet profits still collapsed 16 per cent to £812m.

“Growing optimism has been in evidence for a little while,” says Roddy Davidson, media analyst at broker Altium Securities. But an implied revival remains more of a feel than anything tangibly real. Even the bigger companies remain too “shy to stick their heads above the parapet,” he says.

Worldwide squeeze

Unsurprisingly, the same issues have been extracting a heavy toll on media agencies across the globe. While advertising trends continue to improve Maurice Levy, chief executive of French media giant Publicis recently cautioned that the crisis that has laid waste to the advertising industry for 18-months or more isn’t yet over and pointed out that deeper cost cutting is still required.

This came alongside organic revenue figures – a closely watched barometer in the ad industry that strips out currency effects, acquisitions and disposals – fell 5.4% in the final quarter of 2009, a modest improvement on the 7.4% drop in the June to September period. Smaller French peer Havas saw a marked improvement in fourth-quarter organic revenue while US-based Omnicom also reported a smaller-than-expected decline during the final three months of last year.

Since it is pretty typical for the highly cyclical advertising industry to lead the way out of recessions, it would be easy to make bold assumptions that the cycle has finally bottomed out. Alex de Groote, Panmure Gordon’s media analyst, sits firmly in the optimists camp. “I’m positive across the board,” he says but points specifically at ITV as a stock to watch given its recent upbeat remarks. Speculation has recently emerged implying that advertising revenues in April could be 29 per cent up, compared to the 15-20 per cent increase formerly expected by the market. Panmure’s de Groote believes that ITV forecasts could be “smashed out of sight” this year.Cinzano

Yet challenges clearly remain. While Sir Martin Sorrell expects 2010 to be a more stable year “advertising remains challenged by clients’ continued demands for efficiency.”

“The apocalypse was avoided, and it was followed by the less worse phase. We are in the stability phase, but have not returned to growth yet,” he says.

Industry transformation will sit at the heart of any revival. As Altium’s Davidson sees it, there is increasingly a trend to move towards targeted campaigns that get consumers onside. Developing a “good niche away from blunt, vanilla advertising to targeted campaigns gives more bang for your buck.”

In contrast, “Traditional advertisers will spend millions of pounds producing a co-ordinated campaign,” but then get “knocked off course” by dissenters within the blogging and social networking environment.

The Tweeters speak

Earlier this month the Advertising Standards Authority unveiled a new code of practice that includes a social responsibility clause that aims to crackdown on advertisers that attempt to break the spirit of if not actually the letter of the law. This has prompted David Jones, the head of Havas Worldwide, to warn that negativity created within the social networking media, such Twitter and Facebook, is now a bigger threat to advertising campaigns than regulatory penalties or bans.

But while the advertising agencies do their level best to spot emerging trends and fashions in consumer tastes and behaviour, making hard and fast predictions about the future remains a mugs’ game. For example, rough a year ago when we last looked at the advertising industry in-depth it seemed very likely that consolidation within the advertising space was very likely with ambitious, and cash-rich, companies seemingly likely to take advantage of bottom-of-the-cycle share price valuations etc.

Yet in reality takeovers have largely failed to materialise. For example, of the 15 companies that we listed in our feature (Signs of life in the advertising sector, 7 April 2009) only online field agency Research Now has been taken over, after accepting an £85m deal from US product testing consultancy e-Rewards. Media buyer Aegis also continues to rule out any sort of tie-up with Havas despite the latter’s 2.9.9 per cent stake, much to the disappointment of many investors and further dampening industry takeover excitement.

Three steps to Heaven

Still, crystal ball gazing can be fun if nothing else. GroupM’s Adam Smith sees three key issues surrounding the success or failure of the advertising recovery. First, it will be “fuelled by TV,” where advertising spend “hit a serious trough” last year. Secondly, recovery in the automotive and financial markets, which Smith together accounted for roughly half the decline in ad spend during the recession, so by default, any wider rebound must include these two vital areas. And finally, he expects to see a “polarisation in digital advertising,” where content perceived to add genuine value to end users will remains expensive, the rest becomes a commoditised numbers game.

What seems likely to drive share prices during the rest of 2010 and beyond is good old fashioned fundamentals, including top and bottom line progress. “Earnings will be the biggest driver for share prices,” says Altium’s Davidson, with “ratings expanding in anticipation of that.”

Undercover Columnist says:

Buying directly into the advertising arena is really a play on wider economic recovery and stability, but as an early cycle mover, that time could well be now. Brightening prospects for many companies already, partly thanks to excitement surrounding the Winter Olympics and upcoming World Cup, could see a raft of forecast-busting figures this year, with PR another interesting area to tap into.

Undercover Columnist Picks:

Little market researcher Cello had a horrible year in 2009 but upping its overseas presence and cost cuts will bolster profits. On a prospective PE ratio of 4 and offering a safe 4.3 per cent dividend yield, the shares are attractive at 30p. Elsewhere, we like the look of Chime Communications because of its large PR exposure, an area likely to trade well this year, while broadcaster ITV remains an interesting play coming from a very low base on the advertising front. At 60.75p the shares trade on a 2010 PE ratio of about 20, yet this is based on lowly expectations of just 3p EPS. Many in the market think these targets could be well beaten, putting a 70p Morgan Stanley price target well within reach.

Rightmove may also be seeing ad rates improving but tied to the wider house price market as it is, the shares may yet stumble if interest rates start rising. The shares have been strong lately, up 20 per since early Jan, but a PE of 20 suggests that the share is over-egged given the threat from increasing competition.

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