Back in November 2002, I proffered a fairly simple investing thesis for WPP Group (NASDAQ:WPPGY), the British advertising giant that was my recommendation in our annual stock-picking guide, Stocks 2003. This recommendation came at a time of enormous pessimism in the advertising business brought about by the collapse of ad revenues in several crucial markets, particularly print and Internet.
"One might wonder how advertising can be a sustainable business, since it goes into such swoons," I wrote. "I'd argue instead that advertising and marketing have gone from being an adjunct to being absolutely core to the success of companies around the globe."
The argument, thus, was simple: Buy the companies that are capable of handling global marketing needs for increasingly global businesses, hold them through the pessimism, and await the recovery of the ad market. Of the biggest, most diverse ad companies, including InterpublicGroup (NYSE:IPG), Omnicom (NYSE:OMC), and Publicis (NYSE:PUB), I found WPP Group to be the least expensive and the most promising. As this chart shows, any of the above would have paid off well, but WPP performed the best of the bunch. (Point-in-time bias notwithstanding..)
Why? Because we made the classic contrarian move: We bought a great company at or near the nadir of the business cycle for its industry at a time of maximum pessimism. Very few people could find much nice to say about WPP at the time; advertising was in a shambles.
Fast forward to today. Last night, WPP announced revenues of $7.8 billion and operating earnings of $969 million. These numbers represent a sharp rebound from the bottom, and WPP projects that 2005 should be another record year, particularly in business development coming out of the rapidly developing economies, where the company has a strong presence.
In the past year WPP has merged with advertising group Grey Global and has continued to digest Young and Rubicam, which it purchased in 2000. WPP tends to keep its subsidiary companies separate, even allowing them to compete against one another in bidding for business.
One thing that's interesting about advertising and marketing is that it possesses a cyclicality not in seasonal periods but rather over multi-year ones. Clearly, 2004 had substantial tailwinds built in, with the advertising and marketing thanks to the Summer Olympics, the U.S. presidential elections, and the futbol championships in Europe. But for the first time in a few years, corporate profits have also surged, and corporations have grown much more facile at using Internet advertising, so rates there have also increased. WPP anticipates that this rebound will continue to benefit the company in 2005.
It's nice to see an investing thesis come together. My biggest complaint about WPP is the same one that I had in Stocks 2003: its corporate communications are an absolute mess. Yes, this is a complicated company, but one would think that folks who specialize in marketing and communications could come up with something better if they wanted to. The little voice in the back of my mind that says "maybe they don't want to" gives me more pause than anything else the company could conceivably tell me.
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Bill Mann does not hold shares in any company mentioned in this article. He is the editor of The Motley Fool's annual stock-picking guide -- this year's is charmingly named Stocks 2005. The Motley Fool's disclosure policy ishere.
