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Morningstar | IPG Reported 4Q Organic Growth Well Past its Peers; Maintaining $26 FVE

IPG reported healthy fourth-quarter results in line with our expectations on revenue, despite headwinds from end-of-year account losses as the firm generated strong organic growth in all regions. Strong organic revenue growth was also accompanied by margin expansion. The firm does expect organic growth to decelerate in 2019 given the tougher comps. We do not expect to make any significant adjustments to our model and plan to maintain our $26 fair value estimate for narrow-moat IPG. While the stock did jump nearly 5% in reaction to strong fourth quarter results, and is up 10% year-to-date, we believe there is still about 15% upside for this 4%-plus dividend yield name.

Fourth quarter total net revenue increased 13% from last year to $2.41 billion. Full-year revenue increased by 7.5% to $8.03 billion. Spending from healthcare, consumer goods, retail and auto clients was the most robust. Organic growth during the quarter came in at 7.1%, much higher than the 3.4% in 2017. Geographically, IPG displayed continuing strength in North America with organic growth of 6.3%. We note that while further organic growth in that region is expected, it likely will decelerate significantly given the tougher comps and losses of accounts such as the U.S. Army and Fiat Chrysler. Europe, which represents nearly 20% of IPG’s total revenue, posted organic growth of 5.7%. Revenue from Latin America, Asia Pacific and other regions around the world increased organically at the rates of 17.4%, 6.6%, and 8%, respectively. IPG’s fastest growing and top revenue generating services remained public relations, media, and advertising.

IPG foresees organic growth of 2%-3% in 2019, excluding Acxiom until the fourth quarter, which we think could represent only 10-20 basis points of the guidance.

IPG did note that it is not expecting such deceleration (from 7.1% to 2%-3%) to come from any issues associated with Brexit--which is a valid concern given that the U.K. accounts for 8% to 9% of IPG’s business and was a major contributor to organic growth in 2018. The company expects healthcare and consumer goods verticals to continue to be major contributors to growth in the coming year. We think this may also bode well for IPG's rival, WPP, which generates around 30% of its revenue from consumer-packaged goods clients. Excluding a pretax charge of $30 million-$40 million related to the large account losses, IPG expects 2019 operating margin expansion of nearly 80 basis points to around 14%.