Interpublic Group of Companies Inc.

Transcription

1 February 16, 2015 Interpublic Group of Companies Inc. (IPG-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 05/28/2012 Current Price (02/13/15) $22.10 Target Price $ Week High $ Week Low $16.28 One-Year Return (%) Beta 1.98 Average Daily Volume (sh) 3,209,908 Shares Outstanding (mil) 418 Market Capitalization ($mil) $9,243 Short Interest Ratio (days) 2.01 Institutional Ownership (%) 97 Insider Ownership (%) 2 Annual Cash Dividend $0.38 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.7 Earnings Per Share (%) 27.6 Dividend (%) 16.3 using TTM EPS 22.6 using 2015 Estimate 19.6 using 2016 Estimate 17.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Interpublic reported strong fourth quarter 2014 results with GAAP earnings and revenues both increasing year over year. We believe the company will enjoy sustained growth in the future, owing to its diversified business and extensive geographical footprint. Interpublic s numerous technological collaborations across agencies and continued investments in new businesses will further boost its growth trajectory, going forward. Its impressive talent pool, stringent cost-control strategy and strong liquidity position give a competitive edge over its peers. However, concentration risks and the risk of foreign operational hazards could have a negative impact on its performance in the upcoming quarters. Hence, we maintain our long-term Neutral recommendation on the stock. Risk Level * Below Avg., Type of Stock Large-Growth Industry Advertising/Mkt Zacks Industry Rank * 79 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,543 A 1,756 A 1,700 A 2,123 A 7,122 A ,638 A 1,851 A 1,841 A 2,207 A 7,537 A ,670 E 1,883 E 1,823 E 2,261 E 7,637 E ,013 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) $0.14 A $0.18 A $0.17 A $0.56 A $0.77 A $0.05 A $0.25 A $0.21 A $0.57 A $0.98 A $0.03 E $0.27 E $0.25 E $0.64 E $1.13 E 2016 $1.29 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW New York based, Interpublic Group of Companies Inc. together with its subsidiaries, provides advertising and marketing services worldwide. The company is the third largest advertising company in the world. It offers a range of advertising and marketing communication services, as well as marketing services; along with public relations, meeting and event production, sports and entertainment marketing, corporate and brand identity, and strategic marketing consulting services to a broad list of customers in more than 100 countries. The company focuses on point-to-point client interaction which enables accurate decisionmaking and enhanced customer focus. The company has two revenue segments, Integrated Agency Networks (IAN), comprising Draftfcb, Lowe, McCann Worldgroup, Mediabrands and domestic integrated agencies, and Constituency Management Group (CMG), consisting of a number of specialist marketing service offerings. The Interpublic Group of Companies was founded in September 1930 as a successor to the advertising agency businesses founded in 1902 and 1911 by A.W. Erickson and Harrison K. McCann, respectively, and was formerly known as McCann-Erickson. In 1961, the company was re-incorporated in Delaware and was named The Interpublic Group of Companies. REASONS TO BUY Interpublic expects to strengthen its position with respect to new business activities as well as opportunities from existing and new clients. Its impressive third-quarter results were driven by revenue growth across geographies, as both domestic and international markets gained strength. The company expects to continue with the growth momentum, as its leverages new business wins to improve its growth outlook and translate into margin accretion in the upcoming quarters. The improving position of the agencies whether in PR, healthcare communications, sports and entertainment, or interactive marketing, gain industry recognition on a continuous basis, which augurs well for its long-term growth. Interpublic s digital capabilities, diversified business model and geographic reach offer a distinctive competitive advantage to its clients. The company is expected to achieve targeted levels in the coming quarters based on diversification across emerging regions and collaboration/integration across agencies through technological improvement. Moreover, the company continues to look for strategic investments/acquisitions to expand in high-growth and key world markets. Jack Morton Worldwide acquired Genuine Interactive a leading digital, mobile and social firm in Boston, which is expected to effortlessly connect clients with consumers. This acquisition is likely to boost Jack Morton Worldwide s digital offerings. Additionally, Weber Shandwick, the public relations unit of Interpublic, acquired Swedish creative PR agency Prime and its business intelligence division United Minds. This acquisition will help Interpublic Group to expand its footprint in the Nordics and allow it to exploit Prime s award-winning creative talent, drive innovation and improve client service. With continuous expansion plans and strategic tie-ups, Interpublic Group expects to strengthen its position with respect to new business activities as well as opportunities from existing and new clients. The healthy financials and improving position of ad agencies bode well for the long-term growth of the company. Moving ahead, the company plans to focus on de-leveraging and improving its balance sheet and reducing effective cost of debt. The Group s best-in-industry talent and tools are expected to offer optimal and affordable solutions, thus rendering an edge over its peers. The company recently declared a quarterly dividend of $0.12 per share. This represents a 26% increase in quarterly dividend from $0.095 to $0.12 per share. Additionally, the company authorized a new share repurchase program to buyback up to $300 million of the company s stock. The company s efforts in reducing costs, continuous margin improvement, stronger balance sheet and better capital structure work as an aid in increasing returns and profitability. Equity Research IPG Page 2

3 REASONS TO SELL The company forms a part of the communications industry which is highly competitive in nature. Agencies and media services compete with other agencies and creative or media services providers to maintain existing client relationships and to win new clients. Also, keeping in view the service-oriented nature of the whole industry, it becomes imperative for the company to increase the count of talented employees as well as retain the existing ones. These are likely to reduce its profitability. Although the company is the third largest advertising company in the world, it faces concentration risks as it depends on a few significant customers for a large proportion of its revenues. A reduction in advertisement spending from any of the customers can significantly dent the company s revenues. Moreover, constrained marketing budgets from big clients are expected to slow down organic growth and lead to account loss headwinds for Interpublic Group in the upcoming quarters. Interpublic derives a major portion of its revenues from outside the U.S. This exposes the company to foreign currency translation impacts and poses a threat to the growth of the company. The company also faces other risks like local legislation, monetary devaluation, exchange control restrictions and unstable political conditions, which may lead to a decline in the revenue and impact the financial position of the company as well RECENT NEWS Interpublic Q4 Adjusted Earnings In Line, Revenues Beat December 31, 2014 Interpublic reported fourth quarter 2014 net income of $308.9 million or $0.73 per share versus $193.1 million or $0.44 per share in the year-ago quarter. The increase in earnings was driven by higher revenues. Full year 2014 net income stood at $477.1 million or $1.12 per share compared to $259.2 million or $0.61 per share in Adjusted earnings stood at $0.57 per share in the reported quarter compared to $0.56 in the prior-year quarter. The adjusted earnings per share in the reported quarter were in line with the Zacks Consensus Estimate. For full year 2014, adjusted earnings were $0.98 compared to $0.78 per share in 2013.The adjusted earnings per share for full years 2014 were in line with Zacks Consensus Estimate. Revenues Revenues increased 4.0% year over year to $2,207.1 million in the reported quarter, compared with $2,122.7 million in the prior-year quarter. Quarterly revenues beat the Zacks Consensus Estimate of $2,175 million. The increase in revenues was driven by organic growth, acquisitions, partially offset by the impact of foreign currency translations. For full year 2014, revenues increased 5.8% year over year to $7,537.1 million, compared with $7,122.3 million in Equity Research IPG Page 3

4 Margin Operating income in the reported quarter was $433 million compared with $324.4 million in the prior-year quarter. Operating margin came in at 19.6% versus 15.3% in the prior-year quarter. Operating margin was 10.5% for full year 2014, compared to 8.4% in Total operating expense in the quarter stood at $1,774.1 million versus $1,798.3 million in the prior-year quarter. Balance Sheet At Dec 31, 2014, cash, cash equivalents and marketable securities totaled $1.67 billion versus $1.64 billion at Dec 31, Total debt was $1.73 billion at Dec 31, 2014, compared to $1.66 billion at Dec 31, Share Repurchase Program/Dividend For the full year 2014, the company repurchased 14.9 million shares for $275.1 million at an average price of $18.41 per share. The company authorized a new program to repurchase up to $300 million of the company s stock. For full year 2014, the company paid cash dividends of $159.0 million. The company increased its quarterly dividend by 26% to $0.12 cents per share. Outlook Interpublic aims to consistently boost its top-line performance with sustained focus on organic as well as inorganic growth, going forward. The company is committed to enhancing shareholder wealth by regularly returning significant cash through share repurchases and dividend payouts. For 2015, the company expects organic revenue growth in the range of 3%-4% and increase in the range of basis points in the operating margin. However, going forward in 2015, there remains macro uncertainty relating to both the currency environment and Europe. Equity Research IPG Page 4

5 VALUATION Interpublic s current trailing 12-month earnings multiple is 22.6x compared with 34.0x for the peer group average and 19.2x for the S&P 500. Over the last five years, the shares have traded in the range of 11.8x to 37.1x trailing 12-month earnings. We maintain our Neutral recommendation on Interpublic as we expect it to perform in-line with the broader market. Our target price of $23.00 is based on the 2015 multiple of 20.4x. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Interpublic Group of Companies Inc. (IPG) Industry Average S&P Omnicom Group Inc. (OMC) Itzyourmall, Inc. (IZML) Clear Channel Outdoor Holdings Inc. (CCO) Lamar Advertising Co (LAMR) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Interpublic Group of Companies Inc. (IPG) Industry Average S&P Equity Research IPG Page 5

6 Earnings Surprise and Estimate Revision History Equity Research IPG Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of IPG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 7.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst: Meenu Goyal Lead Analyst: Supriyo Bose Content Editor: Supriyo Bose QCA: Supriyo Bose Reasons for Update: 4Q14 & FY14 Earnings Update Equity Research IPG Page 7