Loss of US media contracts keeps Publicis Groupe bearish

The advertising and public relations company Publicis Groupe S.A. (OTC: PUBGY) is due to release its fiscal 2016 third-quarter results on October 20. The company reported an increase in the fiscal 2016 first-half earnings and revenue, compared to the corresponding period of 2015. Still, the stock remains range bound between 18.50 and 19.50 for the past two months.

The reasons for the bearishness in the stock, among other reasons, is the cautious third-quarter outlook issued by the management. The following paragraph discusses the other possible reasons for the market’s pessimistic view of the stock. Publicis Groupe ended Monday’s trading session at $17.96.

The Paris, France-based company reported first-half net income of €381 million or €1.81 per share, up 5% from €363 million or €1.68 per share in the similar period last year. The H1 2016 top line of the company was €4.75 billion, compared to €4.54 billion in the H1 2015.

Publicis Groupe

The North American segment posted semi-annual revenue of €2.62 billion, against €2.475 billion in the similar period of 2015. However, on a quarterly basis, the scenario looks completely different.

The North American segment’s Q2 2016 revenue declined 0.3% y-o-y to €1.32 billion. On the other hand, the European segment reported a 5.4% y-o-y gain in revenue in the Q2 2016.

The main reason for the decline in the North American revenue is the loss of P&G’s media contract. The contract lost by Publicis Groupe is worth between €50 million and €60 million Euros. In other words, the company has lost 0.6% to 0.7% of its total revenue. It can be remembered that Publicis Groupe’s US subsidiary Starcom MediaVest lost a similar contract from its decade old client Coca Cola, a year before. Similarly, in February 2016, the company lost the account of Walmart, which is estimated to spend about $900 million a year on advertisements.

The company, which also owns agencies such as ZenithOptimedia, Razorfish, Saatchi & Saatchi, has already warned that the third-quarter results will not be impressive. The chief executive of Publicis Groupee, Maurice Lévy, further stated that the company would start seeing the benefits of its transformation program only in 2017.

The UK is the second largest market for the Publicis Groupe. While reporting the first-half results, the company assured that the outcome of the Brexit referendum will not impact its business in a drastic manner as the company does business in the local currency (Pound). Still, the uncertainty created due to Brexit will certainly make the investors rethink before investing in a company which is heavily dependent on the UK for its revenue. Thus, we expect the stock to remain range bound with negative bias during the current quarter.

The historic price chart shows that the stock has broken the support at 18.50 and is currently moving towards the next major support at 16.80. The MACD indicator continues to extend along a downward slope and deep into the bearish zone (below the zero level). Thus, we anticipate the downtrend to continue.

So, buying a one touch put option may suit the current scenario. The target level for the put option should not be less than 17. With a contract validity period of at least one month, a binary trader can remain hopeful of generating returns of up to 90% on the investment.

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