Omnicom: Strong Organic Growth, Strong Buyback
Positive . We had raised our organic growth rates last month, and Omnicom still came in ahead of them on the back of a strong new account win record (in particular the J&J media business, which came from Interpublic; WPP was also cited as a source of business won) and continuing slow and steady improvement in the marketing environment. Omnicom's agency trading desk Accuen (up $30-$40 million in revenue year over year) and the other entities within Annalect were again cited as key growth areas. We remain very interested in management's continued pointing to its interest in further investing in the area of eCommerce. This was noted on the merger termination call, and we expect it's an area where OMC's M&A focus will shift over the next 6-12 months. Whether it takes the typical form of small tuck-ins or something larger, remains to be seen. Margins remain a challenge, exacerbated by FX headwinds in high margin markets like Australia, Canada, Brazil, and Russia. Moreover, management reiterated that ROE and ROIC are the priorities, so the company will continue to serve clients in lower margin businesses that require little to no capital (like field marketing).
Valuation & Recommendation
We are raising our target to $82 from $80 as we roll over valuation to 2015 estimates, implying 17.5x P/E and 8.9x EBITDA. We raise our 2015 EPS estimate to $4.70 from $4.60, reflecting higher share repurchase estimates.
Publicis: Weak 1H14; Balance Sheet Still to Be Tapped
Publicis reported 1H14 headline EPS of €1.31, well below our €1.55 estimate and consensus of €1.51. 2Q14 organic revenue growth of 0.5% was below our 2.8% estimate. Management stated that it will be difficult to reach the previous goal of 4% organic revenue growth in 2014, but that strong margin expansion in 2H should result in them expanding for the full year.
Impact & Analysis
Negative. We remain Outperform rated due to the balance sheet potential; management promised to "enhance" shareholder returns and that the plan will be finalized and presented to the board in mid-September, after which investors will hear more. With a current net cash balance, when 1-2x leverage is appropriate, we believe patience is warranted. We expected soft results in the first period following the end of the merger agreement with Omnicom; however, the magnitude was larger than expected, in part due to weakness in Europe, where results were worse than management anticipated (France notwithstanding). Publicis management is circling the wagons and reviewing its strategic plan over the summer, with a presentation to the investment community expected in early October. Topics to be addressed will likely include 1) Use of a substantially under-levered balance sheet; the company has a €1.8B share buyback outstanding; 2) Reversing softness in faster-growing markets; while each has had its own macro ups and downs, Publicis has seen the group in aggregate recede as a percentage of revenue by more than 1% over the past year, from 24% to 23%, while peers have generally been able to hold or grow them as a percentage of revenue; 3) CEO succession planning.
Valuation & Recommendation
We are lowering our target to €67 from €73, which implies 16.7x 2015E IFRS P/E and 9.5x EV/EBITDA. We maintain our 2H14 headline EPS estimate of €2.30 but are lowering our 2015 estimates to €4.00 from €4.13, while 2016 goes to €4.30 from €4.50, both due to a lower first half base after these results.
Daniel Salmon, Equity Research Analyst at BMO Capital Markets. Research trends at the intersection of entertainment, advertising, data and technology. Dan can be reached at firstname.lastname@example.org. Click to read more on Dan and the BMO Company disclosure.
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