IPG: Outperforming Industry (Again) in 2Q18 - Pivotal Research

Interpublic reported 2Q18 earnings featuring organic growth that came in well above expectations once again with organic growth of 56 operating income margins of 128 vs 123 in the yearago period and adjusted EPS of 043 EPS matched our expectations Guidance was raised to a range of 445 vs the prior 23 range and the full year organic growth rate will undoubtedly be the highest in the industry among IPGamp8217s closest peersRegionally the US was up by 46 as was Latin America UK revenues were up 147 and Continental Europe was 117 APAC reversed recent declines and grew 19Positive results should be framed in context of an industry working through a range of negative trends given weakness among the largest marketers in the economy many of whom lose share to smaller ones who do not tend to use agencies and the application of zerobased budgeting among many of those same marketers We also think that enhanced contract scrutiny is having an effect on all agency holding companies in the wake of increased awareness of contract terms that allowed agencies to generate revenues that were previously not fully understood by their clients for example markups on costs of inventory that do not necessarily involve a holding company taking possession of inventory which can occur in programmatic buying as well as traditional media buying Inhousing in various forms whether it means the use of third party inhouse creative agencies such as Oliver increased reliance on independent production houses directly contracting with managed services for programmatic buying putting amp8220handonkeyboardsamp8221 and fully insourcing programmatic media or other activities is a consequence of tighter budget management We do not see IT services firms as having a major impact on growth at this timeMore generally we to see opportunities for the industry to return to organic growth albeit at levels that are lower than those observed in the 2010mid2016 era A return to that growth will help the industry but at the same time we donamp8217t think IPG outperforms the industry in the longrun even after considering the Acxiom transaction our longterm expectations are that Publicis and WPP probably grow faster due to a higher share of revenues from media and more exposure outside of the US Our valuation on Interpublic stock remains at 23 on a YE2018 basis and we continue to rate the stock HoldVALUATION Our valuation of IPG is derived using a DCF methodology including a 96 shortterm discount rate a 130 longterm discount rate and 35 longterm growthRISKS Agency risks relate to blowback from the transparency issue squeezing fees from clients competition from adjacent industries reduced competition between marketers and demand for advertising servicesamp160FULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE IPG 72418pdfThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers amp160amp160

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IPG: Outperforming Industry (Again) in 2Q18 - Pivotal Research

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Brian Wieser

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IPG: Outperforming Industry (Again) in 2Q18 - Pivotal Research

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Brian Wieser

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