IPG reported another strong quarter featuring organic growth of +6.7% and as-reported growth of +3.9%, continuing a streak of better-than 5.0% quarterly organic growth which has now extended for five quarters. These results were better than our +4.3% forecast on the quarter and StreetAccount consensus of +4.2%. Management noted that organic growth from the top 20 clients was +12%, highlighting the capacity IPG – or any other agency group for that matter – has in finding new ways to generate revenues from marketers, even in the face of declining like-for-like fees.

Regional trends were mostly positive during the most recent quarter, as they were through most of 2015. In the United States, organic revenues were the best for any quarter since 2011, up +8.3%. The UK decelerated somewhat to +3.5%, while continental Europe improved to +1.7% (led by Germany). APAC slowed to +2.7% (including strong growth in China), but Latin America was up a very strong +11.6% (albeit against soft comparables in the year-ago period and despite soft results in Brazil in the most recent period). Business unit growth appeared to be reasonably broad-based at a global level, too, led by McCann, FCB, Mediabrands, Huge and R/GA.

Margins expanded by 70bps in the quarter, slightly above the 60bps improvement pace we had forecast on the quarter and the year, although well above consensus of 20bps. Total earnings on an adjusted basis were positive for the quarter at $0.01/share.

Management refined annual guidance to indicate its expectations for delivering on the high end of previously provided figures (a self-described “cautious” +3% to +4% organic growth alongside 50bps or better of margin improvement). We remain above both of these figures with expectations for +4.4% organic growth alongside 60bps of margin improvement. These results will benefit from the company’s strong business record in 2015 and the limited number of accounts currently at risk

Following these results, we are making minor modifications to our model and maintaining our YE2016 price target on IPG at $26. We continue to rate IPG Buy.

VALUATION: Our valuation of IPG is derived using a DCF methodology which equates to 20x 2016 earnings, driven by mid-teens growth in profit and cashflow in subsequent years.

RISKS. Agency risks relate to blowback from the rebate issue, squeezing fees from clients, competition from adjacent industries, reduced competition between marketers and demand for advertising services.

FULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE: IPG 4-22-16.pdf 

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