EUR 850.00 For Business Accounts Only

Morningstar | Omnicom Reports Better-Than-Expected 3Q Results; Maintaining $85 FVE; Shares Undervalued

Omnicom reported strong third quarter numbers with the top and bottom lines coming in slightly ahead of our projections and consensus. Those results displayed a turnaround in organic growth, especially in the large and all-important U.S. market. Management maintained its full-year organic revenue growth outlook. Brand equity, which we continue to view as an economic moat source for this narrow-moat company, helped Omnicom win some large and well-known accounts, which also bodes well for its organic growth in 2019. We did not make any significant changes to our projections and are maintaining our $85 fair value estimate. While the stock is up 6% in reaction to the better-than-expected numbers, we continue to view Omnicom as attractive, trading in 4-star territory.

Omnicom’s total revenue during the quarter declined 0.1% year over year to $3.71 billion as headwinds from foreign exchange and continued sales of some agencies more than offset 2.9% organic growth. Organic growth in the United States came in at 0.6%, partially offset by a 5.4% decline in Canada as weakness in advertising and media spending in that market continued. The turnaround in the U.S. drove the slight year-over-year organic revenue growth of 0.3% in the North America market. We expect additional improvement in that region, driven primarily by continuing growth in ad spending in the U.S. More specifically for Omnicom, we expect new account wins such as Ford on the creative side (won by Omnicom’s well-known BBDO agency) to further boost organic growth in 2019, for which we model 2.5%. Omnicom also became the only media agency for AT&T’s WarnerMedia. In addition, according to management, many of Omnicom’s clients in the U.S. have begun spending a bit more on marketing and advertising, which further supports our growth projection.

The firm generated organic growth in Europe, Asia-Pacific, and Latin America, while sales in Middle East and Africa declined slightly. In terms of services, the only weakness was seen in CRM Execution & Support (field marketing and sales support services), whose revenue declined 3.6% from last year, mainly due to Omnicom’s disposition of CRM Execution & Support agencies. Other services such as advertising, CRM Consumer Experience, public relations, and healthcare posted organic growth between 2% and 5.5% during the quarter. We have not made significant changes to our revenue model and continue to expect 10-year average organic revenue growth of around 3% through 2027.

Non-GAAP operating margin, which excludes net gains from the sale of Sellbytel and costs associated with the firm lowering its head count and consolidating offices, expanded 10 basis points from last year to 12.7%. For the year, we expect operating margin to remain around 13%. We assume an average operating margin of nearly 13.4% through the next 10 years as revenue growth combined with lower head count and further real estate consolidation is likely to create some operating leverage for Omnicom.