Wall St. Speaks Out on IPG: A Compelling Story? - David Bank, RBC Capital Markets

Key points Fine Tuning 2Q15 Margin Estimates LongTerm Expansion Opportunity Remains amp8211 We expect strong domestic organic advertising growth of 45 and international organic of 41 during 2Q15 We expect a slightly less negative foreign currency impact on estimates a 600 bps drag and total organic revenue growth of 41 We39ve moderated our 2Q15 margin estimate to 112 on slightly higher cost expectations moving our EPS down a penny to 028 inline with the consensus We expect 41 total organic revenue growth in 2015 a hair above company target of 34 EBIT margins of 114 and EPS of 115Wins Outweighing Losses Momentum Remains Solid amp8211 IPG continued with its string of account wins during the quarter Carmichael Lynch won US Bank Fitzgerald won Carrabba39s RGA won Dyson FCB Garfinkel won Vonage Mullen won Scotts MiracleGro and Royal Caribbean and Verizon at RGA Losses were fewer with Tesco the US Navy and Norwegian Cruise Lines among them Overall IPG39s wins continue to outweigh its losses which positions them well for the future Our sense is that IPG has less exposure to the accounts up for review and should not be concerning to investorsDebt Leverage and Buybacks amp8211 IPG has worked hard to get gross debt leverage down below 20x and we wouldn39t expect them to move much above this level in the nearterm Recall in April SampampP increased IPG39s credit rating to an investment grade rating the last of the three major rating agencies to do so which should allow them to tap the commercial paper market if they choose to do so We continue to expect roughly 300 million in share repurchases during 2015 but see upside potential beyond that given leverage levels and cash generationMaintain Outperform amp8211 We continue to believe IPG offers investors an attractive investment opportunity The outlook for organic growth is bright given Interpublic39s quotqualityquot topline and strong new business performance This growth should drive the march toward peer margins in coming years from 93 in 2013 to 121 in 2016E and approaching 13 peer level beyond that Trading at a discount to peers at 150x 2016E EPS peers average is 155x we believe shares continue to appear compelling at current levelsValuationOur valuation methodology derives a 25 price target for Interpublic shares We average our DCF analysis and blended multiple on 2016E EPS and EBITDA We apply a 17x PE multiple and an 105x EVEBITDA multiple above peer average given higher expected growth rate in EPS and EBITDAPrice target impediments Slowerthanexpected growth in the overall economy both in the US and abroad could materially affect organic growth Growth in advertising spending and broader marketing communications spending depends largely on GDP growth and other macroeconomic factors Slower than expected global GDP growth could materially affect organic revenue growthLoss of key clients and headline account losses may negatively affect Interpublic shares While reports of account winslosses that make it to the trade press are generally poor indicators of organic revenue growth for a certain quarter headline loss of an account with sizable billings over 100 million may negatively affect the stock price in the short termLoss of key personnel at the subsidiary agencies may hamper growth Given the serviceoriented nature of the marketing communications industry where there is keen competition for qualified and topproducing employees much of the company39s future growth potential depends on its ability to retain key talent to win new businessForeign currency fluctuations could negatively affect Interpublic39s results Interpublic has a significant international presence with approximately 45 of revenues generated from abroad A material strengthening in the US dollar versus other major currencies could negatively affect Interpublic39s international operationsIPG Price Target USD 2500Link to Full Research Report including Required Disclosures and Disclaimer All values in USD unless otherwise notedPriced as of prior trading day39s market close EST unless otherwise stated

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Wall St. Speaks Out on IPG: A Compelling Story? - David Bank, RBC Capital Markets

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