WHEN it comes to swapping stories about who had the toughest recession, advertising agencies in the early 1990s boasted a tale of gloom that would be hard to beat. UK advertising spending slumped by about 20 per cent between 1989 and 1992 with devastating implications for businesses with such high fixed costs. This in turn sparked traumas at high-profile multinationals such as Saatchi & Saatchi and WPP. But just as boom can turn to slump, so good times can return. They have not yet - at least by the standards of the 1980s - but already smaller, well-run agencies, are doing well and look poised to do much better.
The star turn, with a high share rating to match, is Abbott Mead Vickers, at 432p. AMV did not go in for an orgy of deals in the 1980s, so it had net cash rather than the huge debt and deferred equity commitments that destabilised rivals. This enabled it to maintain staff numbers while rivals slashed costs. It gambled that it could win enough new business to meet continuing high overheads and make good profits.
Proof of the effectiveness of the strategy is that revenue continued to grow steadily through the recession. Total billings for 1994 of pounds 243m were almost double the pounds 123m recorded for the boom year of 1989. Included in those numbers have been some spectacular achievements, such as last year's pounds 50m capture of the BT account. But such a deep recession was not painless even for AMV. Profits were flat between 1989 and 1993.
Now, however, the rewards are coming through. On a 20 per cent increase in turnover in 1994, pre-tax profits rose by 73 per cent to pounds 8.2m. Mark Sevier, an analyst at stockbroker, Rowan Dartington, is looking for further advances to pounds 10.75m and pounds 12.75m over the next couple of years. We shall know more when the company reports interims on 20 September. My hunch is that the company is well satisfied with progress.
Two beneficial factors are the company's link with the US agency giant, BBDO, and a judicious programme of acquisitions. In 1991, BBDO, part of the US-quoted Omnicom, transferred its unprofitable London office to AMV and, in a separate transaction acquired a 25 per cent stake. The relationship has given AMV business as the London arm of BBDO and has also helped it to win new accounts. The initial considerations were relatively small, and the combined impact of these deals could be substantial.
More of a recovery play is Gold Greenlees Trott, at 200p on an historical price/earnings ratio of 15.4. The group was weathering the recession quite well, until it had to issue two profit warnings in the financial year to April 1994.
Michael Greenlees, the chairman, described the period as one of the worst he had seen. But the problems are receding: the group reported a near 50 per cent improvement from pounds 3m to pounds 4.5m for the 1994/95 year, though still well short of the pounds 7.7m achieved, on lower turnover, in 1989/90.
The group recently announced some US account gains, such as Mastercard and Compuserve. If revenue on these accounts develops quickly, forecasts for profits to April 1996 pitched around pounds 5.5m could be exceeded and pounds 7m- plus looks achievable the following year. A performance on those lines would help restore the damage to investor confidence, vindicate what looks a well-judged strategy, and help the shares to perform strongly.
Investing in advertising agencies is a chancy affair. Accounts can easily be lost, as Saatchi & Saatchi (now Cordiant) has discovered. Talent can walk out of the door and agencies have precious few assets beyond the goodwill of their customers. Moreover, consumer spending, the fuel that drives the industry, remains patchy.
But that health warning aside, advertising is something the British do well, and both AMV and GGT look promising investments at what should be an early stage in an upswing in the industry's fortunes.
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