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

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Recent new business results suggest Interpublic will maintain strong top-line growth over the near-term while solid margin results in spite of FX headwinds and ramp in new hiring give us confidence that management will continue to execute on its margin expansion goal. All told, we remain positive on the operational outlook which should lead to Industry leading earnings growth bolstered by returns of capital.

Key points:

Fine Tuning 2Q15 Margin Estimates, Long-Term Expansion Opportunity Remains – We expect strong domestic organic advertising growth of 4.5% and international organic of 4.1% during 2Q15. We expect a slightly less negative foreign currency impact on estimates (a 600 bps drag) and total organic revenue growth of 4.1%. We've moderated our 2Q15 margin estimate to 11.2% on slightly higher cost expectations, moving our EPS down a penny to $0.28, in-line with the consensus. We expect 4.1% total organic revenue growth in 2015 (a hair above company target of 3-4%), EBIT margins of 11.4%, and EPS of $1.15.

Wins Outweighing Losses; Momentum Remains Solid – IPG continued with its string of account wins during the quarter. Carmichael Lynch won U.S. Bank, Fitzgerald won Carrabba's, R/GA won Dyson, FCB Garfinkel won Vonage, Mullen won Scotts Miracle-Gro and Royal Caribbean, and Verizon at R/GA. Losses were fewer, with Tesco, the U.S. Navy, and Norwegian Cruise Lines among them. Overall, IPG's 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 investors.

Debt Leverage and Buybacks – IPG has worked hard to get gross debt leverage down below 2.0x, and we wouldn't expect them to move much above this level in the near-term. Recall, in April, S&P increased IPG's 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 generation.

Maintain Outperform – We continue to believe IPG offers investors an attractive investment opportunity. The outlook for organic growth is bright, given Interpublic's "quality" top-line and strong new business performance. This growth should drive the march toward peer margins in coming years (from 9.3% in 2013 to ~12.1% in 2016E and approaching 13% peer level beyond that). Trading at a discount to peers at 15.0x 2016E EPS (peers average is ~15.5x), we believe shares continue to appear compelling at current levels.

Valuation:

Our 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 P/E multiple and an ~10.5x EV/EBITDA multiple, above peer average, given higher expected growth rate in EPS and EBITDA.

Price target impediments:

Slower-than-expected 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 macro-economic factors. Slower than expected global GDP growth could materially affect organic revenue growth.

Loss of key clients and headline account losses may negatively affect Interpublic shares. While reports of account wins/losses 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 term.

Loss of key personnel at the subsidiary agencies may hamper growth. Given the service-oriented nature of the marketing communications industry, where there is keen competition for qualified and top-producing employees, much of the company's future growth potential depends on its ability to retain key talent to win new business.

Foreign currency fluctuations could negatively affect Interpublic's 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 Interpublic's international operations.

IPG Price Target: USD 25.00

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All values in USD unless otherwise noted.

Priced as of prior trading day's market close, EST (unless otherwise stated).

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