Deutsche Bank has switched its preference in the world of advertising away from FTSE 100-listed giant WPP group PLC (LON:WPP) towards French rival Publicis SA.
In a note to clients, the German bank’s analysts have downgraded their rating for WPP to ‘hold’ from ‘buy’ and cut their target price to 1,750p from 1,890p, with the blue chip group’s shares shedding 0.3%, or 4p to 1,549p in late morning trade.
READ: WPP still experiencing disruptions after cyber attack
Conversely, they have upped their stance on Publicis to ‘buy’ from ‘hold, with an increased target price of €75, up from €67.
The analysts pointed out: “Over the past 12 months the market has become increasingly concerned that advertising agencies are structural losers, caught in the middle between the tech giants and the consulting behemoths.“
They added: “Digging deep with marketers, brand owners and consultants, we conclude the biggest challenges for agencies come from within.
“Their unwieldy organisations have too high exposure to packaged goods companies and retailers in developed markets.”
Ad agencies “face low top-line growth and need to simplify”
The analysts said: “We don't think agencies are in structural decline, although they face low top-line growth and need to simplify.”
They think WPP's long-term model for delivering 10%-15% per annum earnings per share growth will come under pressure “due to high exposure to staples companies, margins that are starting to push towards the company's targeted ceiling and acquisition-led growth, which is adding to complexity instead of reducing it.”
The analysts said they had, therefore, reversed their long-held positive stance on WPP and neutral or sceptical view on Publicis.
They added: “We now see Publicis as well positioned, thanks to its new CEO driving change, recent moves to integrate agency silos, exposure to consulting (c.22% group revenues) and margin growth potential, which could deliver 8% EPS upside in 2018.”