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Agency Business Showed Solid Revenue Growth in 2011

Despite epic ups and downs, 2011 turned out to be a good year for the agency business, at least as far as Wall Street is concerned.

The best performers among the major agency holding companies were Omnicom and Interpublic, according to a new research report by Michael Nathanson of Nomura Securities.

Interpublic "had the most dramatic quarterly organic revenue swings during 2011, beating industry growth by a wide margin in 1Q and 3Q, but underperforming in 2Q and 4Q," Nathanson says. "However, for the full year, Interpublic ended up with growth of 6.1%, tied with Omnicom at the top of the peer group."

Growth in North America slowed to 5.1% in 2011, but that beat the 3.3% rate in Europe. The Rest of the World (ROW) grew by 11.2%.

Nathanson says Interpublic has the highest exposure to North America revenue at over 58%.

Nathanson estimates that Havas is most exposed to Europe at 53% and that WPP posts the highest exposure for the ROW at about 30% of revenue. "We believe WPP's slowest growth in 2011, while being the most exposed to emerging markets, is attributable primarily to its lagging research business," Nathanson says.

In terms of profit margins, Nathanson says IPG still lags the peer group with margins of only 9.8% vs. an average margin of 13.2% for 2011. Publicis continued to lead its peers with full-year margins of 16.1%, while Omnicom remained in the middle of the pack at 12.1%.

"Taking a closer look at the employee changes, Omnicom ramped up its employee headcount in 2011 with growth of 8% to $70,600 at year-end 2011," Nathanson says. "This compares to growth of 3% for IPG at the end of year to $42,400. On a revenue-per-average employee basis, Omnicom is still over 20% ahead, surpassing $200,000 per average employee, which is up 4.4% year over year. However, IPG grew slightly faster during the year at 4.7% to $168k per average employee."

Last week, Interpublic made changes in its Mediabrands media agency executive structure. Richard Beaven, who had been worldwide CEO of Initiative, left and was succeeded by Jim Hytner. Tim Spengler, who had been CEO of Initiative North America, was named Global CEO of Mediabrands' Magna Global unit.

Looking ahead to 2012, based on the high correlation between U.S. and global economic data as well as global and U.S. ad spending, Nathanson calculates that organic agency revenue growth is expected to be in a tight range of 4.4% to 4.6%. He expects Omnicom to be above that range with 4.9% revenue growth and Interpublic to come in at 4.3%

While the agencies are showing revenue growth, Nathanson notes that Nomura prefers its buy-rated media companies as investments because they have exposure to both "resilient national U.S. television advertising and recurring affiliate fee revenues."