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What French Rioters Can Learn From Omnicom's Q3 Earnings

All those rioting French people and Greeks who don't pay taxes might want to look closely at Omnicom (OMC)'s Q3 2010 earnings: From the standpoint of this global ad agency holding company, the economic recovery is blossoming everywhere -- except continental Europe.

Omnicom, which owns a set of gigantic ad agencies known for their creativity such as TBWA, BBDO and DDB, increased revenue 5.5 percent to $2.9 billion in the third quarter. Business was particularly brisk in the U.S. and Asian/Latin American markets, which were up 8.4 percent and 15.5 percent, respectively. Even the U.K. added 3 percent to its revenues.

But the rest of Europe was dans la toilette: revenues were down 8.5 percent in Q3, and down 4.9 percent for the year to date. That means the Europe situation got worse in Q3, not better, and it's going in the exact opposite direction of the nascent global recovery. Here's the revenue breakdown for Q3 and YTD 2010:

Europe is 18.5 percent of Omnicom's business, so the Europe drag has a real effect on this global company. It's also an ominous sign for central Europe -- and the economies that trade with it, such the U.K. and the U.S. -- if my pet theory that ad agency revenues are a proxy for economic growth holds true. That theory suggests that as economies grow, company revenues grow, and their ad budgets grow in tandem. Also, there's a forward-looking element to the theory: Companies only increase their ad budgets in the current quarter if they feel confident about increased sales in the next quarter. So ad agency revenues give you a clue as to how a mixed bag of consumer-facing companies generally feel about the economy now, and how they think it will perform in the future.

Obviously, the P.I.I.G.S. are the problem here: Portugal, Ireland, Italy, Greece and Spain are so laden down with government debt that they can't spend their way out of recession as we can in the U.S. And because Greece in particular is so spectacularly indebted (115 percent of GDP) it threatens to drag down the economies of its neighbors, or beggar them through unpaid bonds, or require a crippling E.U. bailout. This is probably one reason why Omnicom's books are so rosy everywhere except in the euro zone.

There are, of course, a couple of ways that the Greeks and the French et al. could turn things around. They could engage in economic activities that generate extra tax revenue either from payrolls, increased corporate profits, or from property taxes. Those activities would also grow their economies.

But that would require working during August (in France) and paying taxes on swimming pools (in Greece). So, er ... bon chance and καλή Ï„Ï?χη!


Image by Flickr user hern42, CC.