Fool's Eye View

[ March 8, 2000 ]

Go Growth -- Cordiant Communications

By Bruce Jackson (TMF Googly)

To find growth companies, it helps to look for growth industries. Sure, there's some companies that can grow when the industry in which they operate is declining, but they are very much in the minority. So, as investors, why make things difficult for yourselves? Instead of trying to find that needle in the haystack, put the odds in your favour by looking for many needles. The sharp ones still won't be easy to find, but the task will be made a hell of a lot easier.

And today's growth industry is...

Media

I can just hear you saying:

"Boring..."

"Tell me something new..."

"You've already missed the media boat..."

But, there's more to media than just radio, television, magazines and newspapers. In the Motley Fool's brand new Industry Focus 2000 (available from the new Fool Shop for just £17.50) I break the Media sector down into three components -- Marketing & Public Relations, Content and News Provision.

This morning, Cordiant Communications (LSE: CRI) announced results for the year ended December 1999. They describe themselves as "a global creative communications group, with 180 offices in over 74 countries and 7,965 employees."

Warning -- going off topic. I couldn't help but comment on the fact that they seem to know how many offices they have (180), but are not too sure how many countries (over 74) those offices operate in. I'd be interested to hear of possible explanations for this. Anyway, back to the show...

Cordiant are firmly placed in the Marketing & Public Relations part of the media sector. And that is one of the faster-growing segments. For example, by any chance have you seen any "dot-com" companies advertising on billboards, television, buses or taxis? I bet you have, and if you're a Londoner, you almost can't have missed lastminute.com's almost blanket coverage of double-decker buses.

Much of this advertising spend is being funnelled through agencies, and that's where companies like Cordiant are benefiting. Although the global advertising market can only grow by a relatively defined amount (it's difficult to add that much more advertising capacity to that which already exists), a buoyant economy certainly helps, and they can always increase market share by taking business from competitors.

On with the headline numbers...

Sales                 +11.3% to £335.8m
Operating Profit      +28.8% to  £33.5m
Headline EPS          +30.2% to    8.2p

As you can see, profit growth has been pretty impressive. In line with the 2 other main companies in the sector -- WPP Group (LSE: WPP) and Saatchi & Saachi (LSE: SSI) -- Cordiant is stretching its operating margins, and that is fuelling the profit growth. In 1999, Cordiant's operating margin rose from 8.6% to 10.0%, and according to the company it is on track to deliver margins above its 11% stated target for 2000. It doesn't take a degree in rocket science to work out that if sales increase by say 10% in 2000, operating profits will increase by 20%. In most people's language, that's good going, and also there's arguably a high degree of forward visibility with their profits. To add to that visibility, Cordiant have also set themselves a new and demanding target of achieving a 14% operating margin during 2003. Based on WPP's 1999 operating margin of 13.4%, this is eminently achievable.

However, before anyone dives into Cordiant, they should be aware of a couple of important factors surrounding the company and the industry. Although they are most definitely operating in a growth market, this state of affairs is not going to last forever. The Asian wobble of 1998 saw the share prices of many companies slashed, with marketing companies perhaps hardest hit of them all. The health of marketing companies is usually seen as being dependent on the overall state of the economy.

Cordiant's UK revenues increased by only 1%, with operating profits actually declining year on year. That's very disappointing given the buoyant economy. If they don't get their act together, one would dread to think what would happen if, heaven forbid, the dot-com marketing money dried up and the UK fell into recession!

Nevertheless, the market likes what it is seeing at Cordiant, and this morning the shares have been marked up 12.5p to 351.5p. That puts the shares on a trailing price to earnings ratio (P/E) of 43, which doesn't look particularly cheap. But if Cordiant can continue to lift sales by 10% per annum and hit its 2003 operating margin target of 14%, total underlying profits growth over the next 4 years of close to 100% is possible. That would put them on a 2003 P/E of about 21. For a cyclical company, that still looks too high.

Related links
• Fool's Eye View discussion board
• Cordiant quote and summary page
• lastminute.com pre-float special