EUR 850.00 For Business Accounts Only

Morningstar | Omnicom Returned to Strong Organic Growth Accompanied by Margin Expansion; Maintaining $85 FVE

Omnicom reported better than expected fourth-quarter 2018 results driven by strong organic growth in North America alongside some cost control that led to year-over-year margin expansion. Management guided for further organic growth in 2019 but expects no growth in operating margin. We did not make any significant changes to our estimates and are maintaining our $85 per share fair value estimate on Omnicom. We view the narrow-moat Omnicom shares attractive as the stock is currently trading at only a 0.87 price/fair value estimate, which places it in 4-star territory. In addition, Omnicom’s 8.3% announced increase in dividend per share for 2019 pushed the firm’s dividend yield to 3.5%.

Total revenue of $4.09 billion was down 2.2% from last year as the impressive 3.2% organic growth was more than offset by the negative 2.4% and negative 2% impact of net divestitures and foreign exchange rates, respectively. Fourth-quarter organic growth of 2.5% in North America (with 2.6% in the U.S.) improved for the second consecutive quarter after disappointing declines in the previous three quarters. Drivers behind the year-over-year 270 basis point improvement included the completion of more projects and steady growth in revenue from advertising, media, healthcare and public-relations agencies in the U.S. We expect organic growth in North America to continue in 2019, driven by media account wins of the U.S. Army and Daimler AG, along with wins on the creative side, with Ford and Dunkin’.

The firm did well in other developed markets such as the U.K. and other parts of Europe, which grew organically 2.4% and 5.7%, respectively. Strength in France, Italy, and Spain was partially offset by weakness in Germany. The firm also ended the year in other markets--Latin America, Asia, Middle East, and Africa--on a good note as it posted organic growth in every one of those during the quarter. For 2019, management expects overall organic growth of 2%-3%. We note that organic growth during the first half of 2019 is likely to be at a lower rate as revenue from some of Omnicom’s big account wins are not expected to come in until the last two quarters of the year.

Omnicom reported operating margin of 15.3%, which was a 30 basis point expansion from last year, as cost control, mainly back office costs, along with dispositions of low-margin agencies created operating leverage. Management did guide for flat margins in 2019 as we believe onboarding additional talent to work on large and newly won accounts is likely to limit margin expansion in the first and second quarter. We have made a slightly more conservative assumption, a 40 basis point decline in operating margin this year, as we expect Omnicom to further invest in its data and analytics capabilities, which could increase the chance of retaining more clients in the future.