Publicis, WPP Slide After Goldman Downgrades, P&G Ad Budget Cut

Shares of Publicis Group (PUBGY) and WPP (WPP) are trading lower again this morning, deepening their slide after Goldman Sachs analyst Lisa Yang downgraded the stocks to Neutral yesterday. Also yesterday Procter & Gamble (PG) said it is cutting the company's advertising budget and reducing the number of agencies it uses by 50%.

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GOLDMAN MOVES TO SIDELINES: Goldman Sachs' Yang downgraded Publicis to Neutral from Buy yesterday, citing near-term uncertainty around its margin guidance, which she expects the company to reset at its Investor Day on March 20, as well as ongoing client fee pressure. The analyst noted, however, that this may already be reflected in consensus estimates. Yang told investors that she sees risk/reward as fairly balanced in the near-term, with the shares down 11% since being added to her firm's Buy List in July mainly due to concerns around fee pressure, weak end-market trends, account losses and execution risk related to Publicis' reorganization. Nonetheless, the analyst pointed out that Publicis remains her preferred agency, as she is more constructive on its long-term structural outlook relative to its peers as it transitions to a digital transformation agency. Goldman Sachs' Yang also downgraded WPP to Neutral from Buy, saying that the anticipated recovery in the second half of 2017 did not materialize and she expects 2018 to remain challenging for organic growth given persisting end market pressures, a slowdown in principal buying in programmatic as well as weakness in market research. While the analyst acknowledged that recent new business performance provides some tailwind for 2018, she sees risk of upcoming sizeable account reviews such as Ford's (F). Meanwhile, Yang pointed out that the lack of organic growth could weigh on margins, which she expects to decline in 2018 after being flat in 2017.

P&G CUTS AD BUDGET: During the company's earnings conference call, Procter & Gamble CFO Jon Moeller said the company is reducing its advertising budgets as it looks to shift media planning and purchasing in-house: "Looking ahead, we see further cost reduction opportunity through more private market placed deals with media companies and precision media buying, fueled by data and digital technology. [...] We've already reduced the number of agencies nearly 60% from 6,000 to 2,500, saved $750M in agency and production costs, and improved cash flow by over $400M additional through 75-day payment terms. In the next phase, we're targeting to save another $400M reducing the number of agencies by another 50% and implementing new advertising and media agency models. We need the contribution of creative talent and are prepared to pay for that. We don't need some of the other components of the cost. We will move to more fixed and flow arrangements with more open sourcing of creative talent and production capability, driving greater local relevance, speed, and quality at lower costs. We will automate more media planning, buying, and distribution bringing more of it in-house."

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