Summary

• Publicis is the third largest communication group in world with operations in more than 100 countries.
• Dividend yield is 3.5%, one of the highest in Consumer Services industry.
• In 2020 the revenue was resilient partly due to a contribution from Epsilon, acquired in 2019. The company has the highest operating margin in the sector, 16%.
• Publicis has huge growth opportunities, but the stock is overvalued by the stock evaluation method based on P/E.

Dividend    Revenue    Profitability    Financial Strength    Investment Case

A French advertising and public relations company Publicis Groupe (PUB) is involved in every step of a value chain, from consulting to execution. Its 4 main business lines are as follows:

• Communication – Publicis advises clients on their brand strategy and creates dynamic content. Activities are structured around brands like Publicis Worldwide, Leo Burnett, Marcel and BBH.
• Media – organized around brands such as Starcom, Zenith and Spark Foundry.
• Data – an acquisition of the Epsilon (the marketing Big Data specialist) in 2019 allows to support clients’ digital and marketing transformation.
• Technology – Publicis Sapient, technological and digital platform, accelerates clients’ digital transformation in automotive, healthcare, financial services and other industries.

Publicis has a specialized business in healthcare with brands such as Digitas Health and Publicis Health Media.

It has the following geographical regions: North America (62% of net revenue in 2020), Latin America (2%), Europe/Russia (23%), Middle East/Africa (3%) and Asia Pacific (10%). Publicis organizes its operations by country in 10 main markets to leverage synergies between areas of expertise. The client portfolio is diversified and includes clients that are national/global leaders in their industries. Top 30 clients represent 37% of net revenue.

Since 2006 the company has focused on developing its digital business. It acquired the Digitas, Sapient, Epsilon and other companies which allowed to support consumers’ digital transformation and offer personalized campaigns on scale. The pandemic contributed to the rapid acceleration of digitalization of companies and a growth in online advertising.

  Dividend

Before the pandemic the dividend has been in consistent and smooth uptrend. The dividend for 2019 was reduced 46% due to the pandemic related uncertainties. In 2020 it was increased from EUR 1.15 to EUR 2 per share. The company aims the payout ratio of 45% (Publicis calculates it as a percentage of diluted EPS). In 2014 it was raised to at least 35% and since then it has increased to almost 47%. The dividend is sustainable as free cash flow, EUR 2.24 B, covers well dividend payments with coverage ratio of 4.5x. Basic EPS is EUR 2 per share, so it also covers dividend.

  Revenue

Over the last 5 years revenue growth has not been significant except 2019, when revenue was up about 10% due to the consolidation of the acquired Epsilon. In 2020 the revenue, impacted by the Covid – 19 related disruptions, was down from EUR 11 B in 2019 to EUR 10.79 B. Net revenue (revenue less pass-through costs) was down by 0.9% to EUR 9.7 B. Thus the revenue was resilient in that challenging year. Partly it was achieved due to acquisitions. There was a contribution of EUR 0.73 B to the net revenue, mainly from Epsilon.

Many sectors of economy, particularly travel and leisure, have been hit hard by the pandemic. The company’s main client business sectors are Automotive (16% of net revenue in 2020), Financial (15%) and Food & Beverages (13%). In 2020 revenue growth in healthcare and some other divisions made up for a decline in Automotive and Financials.

The US was the best performing region for the year. Even though the growth on reported basis was positive, the organic growth was negative at -2%. Healthcare had particularly strong, double-digit growth. The change in exchange rates negatively affected the results in Latin America.

In the first half (HY1) of 2021 Publicis has had strong performance, fully recovering revenue lost in 2020 (organic growth of 9.7% versus -8% in HY1 2020). That was possible due to mass – reopening in Europe and uplift in the US economy. Looking ahead Publicis expects further revenue growth based on its country model supported by global delivery centers and shared services. In HY1 2021 update the company expects full organic recovery with 7% growth in 2021 versus 6.3% decline in 2020.

  Profitability

Earnings have been volatile over the past several years. In 2020 EPS is down from EUR 3.6 in 2019 to EUR 2.4. The net profit decreased from EUR 0.84B to EUR 0.58B, by 31%. Operating profit totaled EUR 0.98B, decrease of 22% over year. Operating margin, EBIT as percentage of net revenue, was 16%, only slightly down from 16.9% in 2019. Profitability has been impacted mainly by higher by 2.8% personnel expenses (personnel expenses represent 64% of net revenue of the company). Expenses were higher due to an impact of Epsilon consolidation effective since July 2019. The company has kept a strict control of costs during the year. In April it announced an intention to save EUR 0.5 B in costs as the level of activity had reduced. Hiring was suspended and about 6000 managers had voluntary reductions in salaries. The internal artificial intelligence platform Marcel was introduced which connected about 80K employees of the company.

In HY1 2021 Group’s net profit is EUR 0.414 B while in 2019 HY1 it was 0.136 B. That results in strong rebound in EPS.

The company’s M&A activity has had a big effect on the reported EPS. So it could continue to be volatile in the future. Already in 2021 operating margin rate is expected to be back to the pre-pandemic level. On the other hand substantial part of the company’s costs are staff related ones. So undergoing wage inflation puts pressure on the profitability. For our projection of the future stock price we assume that EPS in the coming years would be slightly above the average EPS over three pre-covid years, EUR 4 per share (the three years average is EUR 3.8).

  Financial Strength

Company Capital Structure

In EUR B

Financial debt is down significantly over year. The company can easily make interest payments as operating profit covers interest payments at almost 7x. Also operating cash flow is healthy 66% of debt. The company’s cash was EUR 3.7 B and liquidity was at EUR 6.3 B at the end of 2020. So the balance sheet is strong and improving. Publicis has S&P agency’s BBB rating with a stable outlook.

  Investment Case

The estimate of future stock price and investment returns based on P/E ratio

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

Publicis is a global market leader with well-known brand. It has efficient business model with global delivery centers, shared services and internal platform Marcel. The company is highly exposed to growing North American markets. According to Morningstar total ad spending in the US would grow 12.6% in 2021 and 9.5% in 2022 and digital advertising even more, 22.5% and 17.5% respectively. Thus the growth opportunities are high for the company. These opportunities mean that Publicis could expect stronger revenue growth and some profitability improvement. However our historical P/E based stock price projection shows no potential investment returns as the stock is overvalued.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any position within the next 72 hours.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.