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

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IPG reported a very strong 2Q18 vs. expectations, once again outperforming the industry to a significant degree. We continue to rate IPG Hold with a $23 price target.

Interpublic reported 2Q18 earnings featuring organic growth that came in well above expectations once again, with organic growth of +5.6%, operating income margins of 12.8% (vs. 12.3% in the year-ago period) and adjusted EPS of $0.43. EPS matched our expectations. Guidance was raised to a range of +4-4.5% vs. the prior 2-3% range, and the full year organic growth rate will undoubtedly be the highest in the industry among IPG’s closest peers.

Regionally, the US was up by +4.6% as was Latin America, UK revenues were up +14.7% and Continental Europe was +11.7%. APAC reversed recent declines and grew +1.9%.

Positive 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 zero-based 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, mark-ups 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). In-housing in various forms, whether it means the use of third party in-house creative agencies such as Oliver, increased reliance on independent production houses, directly contracting with managed services for programmatic buying, putting “hand-on-keyboards” 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 time.

More generally, we to see opportunities for the industry to return to organic growth, albeit at levels that are lower than those observed in the 2010-mid-2016 era. A return to that growth will help the industry, but at the same time, we don’t think IPG outperforms the industry in the long-run (even after considering the Acxiom transaction, our long-term 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 Hold.

VALUATION:Our valuation of IPG is derived using a DCF methodology including a 9.6% short-term discount rate, a 13.0% long-term discount rate and 3.5% long-term growth.

RISKS. 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 services.


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