The Advertising Sector: The Breakdown
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Advertising is as large a part of our modern society as anything. It may even be bigger than air. When someone starts selling "premium" air, I don't even know what will happen. But until then, I feel like getting into an industry that's everywhere at once. While a lot of advertising groups are either privately held or simply sections of a larger company, there actually is a niche of publicly traded ad agencies that look like pretty good ideas.
A major part of where Facebook (NASDAQ: FB) and a lot of other online companies derive their revenue is from selling ad space to third parties. This is advertising, but it goes far deeper than that. I like that Facebook provides ample amounts of content to draw in the viewer. I also like that Facebook is experimenting with its own online method of payment, and this could allow them to pull off a feat similar to how well eBay has done with adding PayPal to its offering. The potential for future profits is there, once the "hot stock" frenzy dissipates and we see how Facebook does beyond being a fad. While Facebook does market a lot of products and services, it cannot be called a dedicated marketing company.
Whereas companies like Facebook make their profit from selling space on a site that attracts users because of its content and social opportunities (It's the only way I can talk to a lot of family and friends -- but I've never spent a dime there), an advertising company generally designs the campaigns that create the ads you see and hear.
Interpublic Group of Companies (NYSE: IPG) is a prime example of the general method an advertising company uses. To quote the company profile from TDAmeritrade, Interpublic's subsidiaries "... specialize in consumer advertising, digital marketing, communications planning and media buying, public relations and specialized communications disciplines." In other words, they do a lot of different things. While I like IPG's 2.09% dividend, I'm still a little bearish on the company because of its 12-and-some-change P/E ratio and slight over-diversification. They do a lot in advertising, and I think they might not have enough focus to really outperform.
Omnicron Group (NYSE: OMC) is an even more straightforward version of the classic advertising agency. Omnicron works with clients to develop advertising strategies, and that's a fairly solid business model. Basically, this is a company that helps other companies to sell their products and services. What I don't like about Omnicron is their 15.4 P/E ratio and the fact that more than 91% of the company is institutionally owned. When the institutions put their hands in the pie, they always seem to make a mess. I'd rather stick to less popular companies...
Companies like Focus Media Holding (NASDAQ: FMCN), for instance. This is an awesome company for several reasons, and I do believe I'll be picking up a few shares as soon as the Fool's rules allow me to do so. First off, it's got a fascinating concept in the form of placing LCD advertising units in public spaces. The red tape Focus Media had to go through to arrange that gives it a strong moat. But a strong moat isn't everything. I also like the current 2.24% dividend and the 16.68 P/E ratio. The fact that Focus Media happens to be located in China, one of the largest growth areas in the world, certainly doesn't hurt.
To keep the P/E ratios in perspective, my idea of a "high" P/E is anything over 10. I seek out the best possible deal I can. However, a lot of people might argue that since the S&P 500's average is around 16 right now, "high" P/Es would need to be above that. I say that just because there are a million crazy people overpaying right now is no excuse for me to join in the frenzy and drive prices into even crazier territory. In my opinion, buying an investment that couldn't pay for itself in 10 years (all other variables being about equal, which they never really are) is paying too much. There are occasions when a great moat, a blue chip or some other factor can mitigate the "10 or less" concept, I'd rather err on the side of caution.
If you've been thinking about putting some international exposure into your portfolio, Omnicron is pretty decent. It actually outdoes FMCN in that regard, as Omnicron operates in several different countries. But as far as solid fundamentals go, if you're reasonably assured that Focus Media's books are being audited properly, it's a pretty solid long-term bet. Just remember to do your research. Just because I say something doesn't mean I'm right, and it doesn't mean anything good will come of it. I am a Fool, you know.
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pongun has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.