EUR 850.00 For Business Accounts Only

Morningstar | IPG Reports Strong 2Q and Ups Revenue Guidance; Maintaining $25 FVE; Shares Slightly Undervalued

IPG’s second-quarter numbers beat on the top and bottom lines as the firm continued its impressive organic growth. In addition, unlike some of its peers, IPG results demonstrated strong organic growth in the U.S. Other growth drivers included higher demand for creativity, plus a slight increase in ad spending by consumer packaged goods companies, which we think may also bode well for WPP's second-quarter results. With better-than-expected growth in the first half of 2018, IPG upped its full-year organic growth guidance to 4%-4.5% and continues to expect a 60-70-basis-point operating margin expansion. We adjusted our projections slightly higher, which did not have an impact on our fair value estimate of $25 for IPG. We now view this narrow-moat name as attractive as it is trading in 4-star territory with a 14% upside.

Total second-quarter net revenue of $1.9 billion was up 6.2% year over year, driven by a 5.6% organic growth, 1.4% from foreign exchange, offset partially by a 0.8% decline from agency dispositions. IPG's year-over-year organic growth consisted of growth in all regions, led by nearly 15% and 12% in the U.K. and continental Europe, respectively, which we think was partially due to the 2018 World Cup. We were mainly impressed by the 4.6% growth in the U.S., which represents more than 60% of the firm’s total net revenue. It appears that consumer packaged goods firms in the U.S. and Europe have begun to increase ad spending slightly. The firm also benefited from higher spending by clients in the healthcare, financial services, government, and auto and transportation verticals. During the call, management announced some new account wins including Godiva, Kimberly-Clark, Allied Financial, IBM, and Sony. On the creativity front, agencies such as FCB, MullenLowe, and McCann performed well, which we think will continue to help IPG differentiate itself from some newcomers like consulting firms.

Operating margin expanded nearly 50 basis points from last year to 12.8%, as IPG continues to increase utilization of its talent and control overall costs. While we are projecting higher salaries and related expenses as a percentage of net revenue, we expect IPG to lower G&A expenses, possibly widening operating margin by 70 basis points in 2018, at the high end of the firm’s 60-70-basis-point margin expansion guidance.

Regarding the recently announced acquisition of Acxiom, we remain cautious. In our view, while IPG will gain access to valuable global consumer data, which can help the firm diversify its revenue and possibly become a one-stop shop for advertisers, Acxiom’s marketing solutions, or AMS, will also require more capital expenditure for system maintenance and data management, likely offsetting benefits of faster top-line growth and slight margin expansion. Plus, this $2.3 billion all cash acquisition represents 3.5 times trailing-12-months' revenue, which we think might be too high given that AMS revenue has declined the past three years.

In addition, acquisitions of some of Acxiom’s peers in the past have been at slightly lower multiples. For example, in 2017, Neustar was taken private at a $2.9 billion price which represented 2.4 times revenue. Plus, Neustar was growing at a 10% three-year CAGR with average adjusted EBITDA margin of 46%, higher than the 25% which IPG has estimated for AMS. We note that while IPG is buying AMS at approximately 11.5 times adjusted EBITDA, we estimate the Neustar deal was around 5.4 times adjusted EBITDA. There have been transactions representing slightly more comparable multiples, such as Dentsu buying Merkle in 2016 for $1.5 billion or 3.4 times trailing-12-months' sales. However, when it came to AMS, it appears IPG's peers, including Dentsu and Publicis, decided not to offer as high of a multiple.