11/2/2010 1:48 PM ET|
'Mad men' suiting up for a rally
Another sign the business world is rebounding: The advertising industry is making a profitable comeback. Don Draper, TV's favorite ad man, would no doubt drink to that.
In one of the best signs that the recovery is on track, the advertising world's rambunctious "mad men" are back on the prowl.
Those dream-weaving pros -- nicknamed mad men during the 1960s and now featured in an award-winning TV series with the same name -- no doubt have healthier ways of celebrating today. The chain-smoking and bourbon-soaked afternoons of the go-go era are passé.
But however the real-life Don Drapers and Peggy Olsons party these days -- and wherever, since they're no longer centralized on Manhattan's Madison Avenue -- mad men (and women) have good reason to live it up.
Their business -- creating ads to convince people that a product can bring instant happiness and fulfillment -- continues to rebound sharply from a grim 2009.
Last week, three industry giants reported very strong third-quarter earnings and revenue growth, building on a decent second quarter, as carmakers, brokerages and consumer-goods giants all spent more to woo consumers. London advertising giant WPP (WPPGY, news) offers a great inside glimpse of sector trends because it's a huge international player, with mad men working in every facet of the business -- from advertising and marketing to brand management, public relations and data analytics. This says it all: The third quarter was the company's best quarter in 10 years.
Revenue picked up 7.5%, building on a 4.7% gain in the second quarter and following a flat first quarter.
And, perhaps most tellingly, sales grew throughout the third quarter, indicating that the momentum continues. U.S. revenue growth was particularly robust at 9.9%. But growth was also impressive in emerging markets (up 7.6%) and even Europe (up 4.7%), which had been all but left for dead by many market pundits.
Two other industry leaders, Omnicom Group (OMC, news) and Interpublic Group of Companies (IPG, news), also recently reported that big account wins in the third quarter drove revenue up 6.7% and 9.4%, respectively.
Martinis and Lucky Strikes, anyone?
"The ad recovery is so strong right now," top-ranked sector analyst Alexia Quadrani of JPMorgan Chase (JPM, news) said in an interview last week. "It's been really robust. Everything in advertising is growing better than expected."
In a note last week, Quadrani summed up what's to come: "Importantly, management teams all spoke of continued strong growth going into the fourth quarter," with no sign of a letup next year.
Spin is in
The upturn in ad spending should really be no surprise. It's related to all the cash that companies have on their balance sheets -- nearly $2 trillion by some counts.
They're also spending on things such as takeovers and capital investments, as I discussed in "Get your slice of a $2 trillion pie." Stepped-up advertising has to follow to support those investments, believes Bradley Johnson, the director of data analytics at Ad Age.
Automakers, for example, account for a big piece of the current upturn in ad spending. That's likely to continue because of all the major new car models hitting the streets, including the redesigned Ford Motor (F, news) Focus, the Chevrolet Cruze from General Motors, a new Civic from Honda Motor (HMC, news) and the Elantra from Hyundai Motor (HYMLF, news).
"Billions have been spent designing these cars. Car companies have no choice but to spend heavily on marketing to fight for market share," says Johnson.
Besides the top-line growth, here's another sign of strength in the sector: Advertising and marketing companies, Johnson points out, have been hiring more mad men for seven consecutive months.
As of the end of September, for example, the number of employees at WPP was up 3.5% for the year, to 102,759. Hiring is often a promising sign for stocks, especially in this economy, as I explained in "5 companies that aren't afraid to hire."
Strength in the past two quarters has analysts raising estimates for the sector. Brian Wieser, the director of forecasting at Magna Global, a division of Interpublic, recently increased his forecast for 2010 ad spending growth to 2.8% from 2.1%. He expects 3.1% growth next year.
That might not sound like much, but it's a big deal considering the sector contracted 16% last year.
Plus that 3.1% growth is on par with the growth of 3.4% in 2003, coming out of the previous recession. It's also really not that far below the 4.8% long-term average annual growth for 1980-2010. (All of these numbers exclude the temporary effects of political ad spending and the Olympics.)
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