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Morningstar | Solid 2Q Performance by IPG; Expect a Weaker Second Half; Maintaining $26 FVE; Shares Undervalued

IPG reported another healthy quarter with in line net revenue and earnings higher than consensus expectations. Strong top-line growth was driven by impressive total organic growth, while the higher-margin Acxiom business, along with continuing cost control, helped the bottom line. Management now expects 2019 organic growth to come in at the high end of its previously guided 2%-3%, implying a revenue decline in the second half given tougher comps and a few account losses in late 2018. IPG also maintained its 40-50 basis point margin expansion guidance. We do not see any reason to change our outlook and are maintaining our $26 per share fair value estimate.

We are impressed by IPG’s performance on all fronts, whether it is organic ad and media revenue growth, Acxiom data management integration, or overall margin expansion. We remain confident that the firm will cycle through the account loss headwinds and tough year-over-year comps it will face the next two quarters and return to organic growth beginning second quarter next year. The stock is down 2% and remains 4-star rated with a 16% upside based on our fair value estimate. We continue to view this narrow-moat name and its 4% dividend yield as attractive.

Total net revenue increased 9.1% year over year to $2.1 billion due to the acquisition of Acxiom and 3% organic growth. U.S. net revenue (63% of the total) posted 0.6% organic growth as the strength in overall spending in nearly all sectors was partially offset by the impact of the 2018 account losses. The effect of those accounts, which include Fiat Chrysler, Army, and Volkswagen, will be felt the next two quarters. It appears that spending by its current clients continues to grow, partially offsetting the account-loss headwinds. Growth in spending by IPG’s consumer goods clients may also bode well for larger rival WPP, which has much higher exposure to that sector.

IPG posted 4.7% and 9.2% organic growth in the U.K. and Continental Europe, respectively, with the latter being driven mainly by strength in Germany, Italy, and Spain. Weakness in China is apparently being felt by every ad holding company as it dragged IPG’s Asia-Pacific organic net revenue down 0.3% from last year. Impressive growth in Brazil, Mexico, Argentina, and Colombia drove a 25.1% increase in Latin America organic net revenue.

Both of the firm’s segments performed well, with IAN revenue growing 3.2% organically, driven by strong performances of IPG’s media, creative, and digital agencies. With Acxiom revenue, total IAN year-over-year growth was 10.8%. The CMG segment, which is mainly public relations and sports and entertainment marketing, posted organic net revenue growth of 1.9%.

On the margin front, IPG continued its cost control, which along with the addition of the higher margin Acxiom data management business, pushed the operating margin 30 basis points higher year over year. Operating margin for the first six months was up 140 basis points. However, we expect such expansion to subside a bit throughout the next six months due mainly to additional costs associated with further integration of the Acxiom offerings.