EUR 850.00 For Business Accounts Only

Morningstar | Interpublic Group's 1Q Results Beat Expectations, Second-Half Slowdown Is Expected; Intact $26 FVE

Interpublic Group of Companies started 2019 with better-than-expected organic growth and continuing margin expansion. However, the firm maintained its full-year outlook as it expects deceleration in organic growth the rest of 2019 due to tougher comps and the impact of some account losses in late 2018 that may also pressure margins. After updating our model with first-quarter numbers, we are maintaining our $26 fair value estimate on narrow-moat Interpublic. The first quarter’s strong results pushed the stock up more than 5%, but it continues to trade at 0.90 times our fair value estimate, or in 4-star territory, which we think makes this 4% dividend yield stock attractive.

Interpublic reported first-quarter net revenue of $2 billion (which included what we estimate was over $170 million from the Acxiom acquisition), up 13% from last year. The firm’s organic net revenue growth was 6.4%, with strength seen across the board. Increases in media and advertising services were the main drivers of such growth. From a segment standpoint, while Acxiom is now part of Interpublic’s IAN, the segment still posted organic growth of 7.4%, indicative of higher demand for Interpublic’s media and creative offerings. The public relations side of the business grew nearly 2% organically.

Net revenue from U.S. clients, which represent more than two thirds of its total revenue, grew 5.7% organically, surpassing its peers’ growth rates this quarter. The same can be said of revenue coming in from Europe, Asia-Pacific, Latin America, and other regions, which displayed organic growths of 6.6%, 4.5%, 23.8%, and 5.2%, respectively. However, we do not expect such growth to continue throughout 2019 as the firm will be facing tougher comps and did lose accounts late in 2018, including the U.S. Army and Fiat Chrysler. The firm did win a number of new but smaller accounts, which we think can continue throughout the year, enabling it to maintain 2%-3% organic growth also in 2020.

We have modeled organic growth deceleration during the next three quarters, in line with Interpublic’s full-year 2%-3% organic growth outlook. While growth for the firm will slow, the 2%-3% rate for the year is commendable as it is in line with its peer, Omnicom, and exceeds WPP’s organic loss outlook. We note that WPP, while it remains the market leading ad holding firm, is currently in a turnaround process and is making headway, in our view.