Rating Update: Stock Rating B-Positive (10/17/19)-Omnicom Group Inc. (OMC).

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BUSINESS

Omnicom Group Inc., together with its subsidiaries, provides advertising, marketing, and corporate communications services. The company offers a range of services in the areas of advertising, customer relationship management, public relations, and healthcare. Its services comprises advertising, branding, content marketing, corporate social responsibility consulting, crisis communication, custom publishing, data analytics, database management, digital/direct marketing, digital transformation, financial/corporate business-to-business advertising, graphic arts/digital imaging, healthcare marketing and communications, and instore design services.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, OMC is expected to continue to be a major Value Builder.

Omnicom has a current Value Trend Rating of B (Positive).
The Value Trend Rating reflects consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Omnicom has a neutral Appreciation Score of 59 and a slightly positive Power Rating of 65, with the Positive Value Trend Rating the result.

Omnicom’s stock is selling well below targeted value. The current stock price of $76.03 compares to targeted value 12 months forward of $107.
This neutral appreciation potential results in an appreciation score of 59 (41% of the universe has greater appreciation potential.)
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Omnicom has a Power Rating of 65. (This slightly positive Power Rating indicates that OMC’s chances of achieving favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly positive Power Rating include: earnings estimate behavior for OMC has been slightly favorable recently; recent price action has been slightly favorable; and is currently in a modestly favorable positi.

INVESTMENT PROFILE

Omnicom’s financial strength is high. Financial strength rating is 87.
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Relative to the S&P 500 Composite, Omnicom Group Inc. has slightly more Growth than Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that OMC is lower risk. Relative weaknesses include: high financial leverage, and low expected growth. Omnicom’s valuation is low: high dividend yield, low P/E ratio, and high price/book ratio. OMC has low market capitalization.

CURRENT SIGNALS

Omnicom’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; rising tax keep rate; and rising leverage.

Omnicom’s current technical position is very strong. The stock price is in a 20.3 month up move. The stock has appreciated 28.0% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Omnicom Group Inc. (NYSE: OMC) has recently enjoyed slight positive changes in fundamentals: significant quarterly earnings acceleration occurred.
The stock is currently rated B.
Omnicom Group Inc. (NYSE: OMC) stock enjoyed a major increase of 50.0% on 10/17/19. The shares closed at $0.01. However, below average trading volume at 73% of normal accompanied the advance. The stock has been strong relative to the market over the last nine months and has risen 1.6% during the last week.

CASH FLOW

In 2018, Omnicom experienced a decrease in cash of -$138 million (-4%). Sources of cash were very modestly less than uses. Cash generated from 2018 EBITDA totalled +$2,368 million. Non-operating uses consumed -$19 million (-1% of EBITDA). Cash taxes consumed -$563 million (-24% of EBITDA). Re-investment in the business amounted to -$249 million (-11% of EBITDA). On a net basis, debt investors withdrew -$282 million (-12% of EBITDA) while equity investors pulled out -$1,394 million (-59% of EBITDA).
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Omnicom’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Omnicom Group Inc. Peer Group as well. In most years, Omnicom was in the second quartile and top quartile. Currently, Omnicom is at the upper quartile at -1% of EBITDA (-$19 million).

Omnicom’s Cash Taxes, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by stability for the Omnicom Group Inc. Peer Group. In most years, Omnicom was in the lower quartile and top quartile. Currently, Omnicom is lower quartile at -24% of EBITDA (-$563 million).

Omnicom’s Business Re-investment, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Omnicom Group Inc. Peer Group. In most years, Omnicom was in the top quartile and second quartile. Currently, Omnicom is upper quartile at -11% of EBITDA (-$249 million).

Omnicom’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Omnicom Group Inc. Peer Group. (Since 2016 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Omnicom was in the third quartile and second quartile. Currently, Omnicom is slightly above median at -12% of EBITDA (-$282 million).

Omnicom’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Omnicom Group Inc. Peer Group. In most years, Omnicom was in the third quartile and lower quartile. Currently, Omnicom is lower quartile at -59% of EBITDA (-$1,394 million).

Omnicom’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Omnicom Group Inc. Peer Group. In most years, Omnicom was in the top quartile and second quartile. Currently, Omnicom is substantially below median at -6% of EBITDA (-$138 million).
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Omnicom’s Cash, %Revenue has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Omnicom Group Inc. Peer Group. In most years, Omnicom was in the second quartile and top quartile. Currently, Omnicom is upper quartile at +24%.

PROFITABILITY

Omnicom Group’s return on equity has improved very significantly since 2009 decelerating sharply after the 2016 level.
The key to the story for OMC is a very small positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors.
The productivity of Omnicom Group’s assets declined over the full period 2009-2019: asset turnover has experienced a downtrend.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Omnicom Group’s return on equity is at the upper quartile (55.3%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is slightly above median (7.7%) reflecting asset turnover that is at median (0.60X) and at median pretax margin (12.9%).
Tax “keep” rate (income tax management) is lower quartile (68.9%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is upper quartile (10.39X).

GROWTH RATES

Overall, Omnicom Group’s growth rate has slowed considerably in recent years.
Omnicom Group’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 5.5% per year. (More recently it has been 1.8%.)

Total asset growth has been 6.2% per year.

Annual E.P.S. growth has been 8.6% per year.

Equity growth has been -2.6% per year. (More recently it has been 4.8%.)

Omnicom Group’s consensus growth rate forecast (average of Wall Street analysts) is 5.1% — in line with the average of the historical growth measures.
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Relative to the Omnicom Group Inc. Peer Group, Omnicom’s historical growth measures are generally second quartile. Revenue growth (5.5%) has been slightly above median. Total asset growth (6.2%) has been at median. E.P.S. growth (8.6%) has been at median. Equity growth (-2.6%) has been lower quartile.

In agreement with this pattern, consensus growth forecast (5.1%) is lower quartile.
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PRICE HISTORY

Over the full time period, Omnicom Group’s stock price performance has been variable and slightly below market. Between December, 2008 and October, 2019, Omnicom Group’s stock price rose +182%; relative to the market, this was a -15% loss. Significant price move during the period: 1) September, 2011 – February, 2015: +116%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 19.0% is substantially above median relative to the S&P 500 Composite.
In addition to being substantially above median relative to S&P 500 Composite, current annual total return performance through September, 2019 of 19.0% is substantially above median relative to Omnicom Group Inc. Peer Group.

Current 5-year total return performance of 5.7% is substantially below median relative to the S&P 500 Composite.
Through September, 2019, with substantially below median current 5-year total return of 5.7% relative to S&P 500 Composite, Omnicom’s total return performance is at median relative to Omnicom Group Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, OMC’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the price/equity ratio, followed by the price/earnings ratio, then by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets. The lowest factor, ratio of enterprise value/revenue, is lower quartile.

Relative to Omnicom Group Inc. Peer Group, OMC’s overall valuation is low. The highest factor, the price/equity ratio, is near the upper quartile. Price/earnings ratio is at the lower quartile. Ratio of enterprise value/assets is at the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is at the lower quartile.
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Omnicom has a major value gap compared to the median. For OMC to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.40X to 2.24X. If OMC’s ratio of enterprise value/revenue were to rise to 2.24X, its stock price would be higher by $58 to $134.
For OMC to achieve upper quartile valuation relative to the Omnicom Group Inc. Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.40X to 3.63X. If OMC’s ratio of enterprise value/revenue were to rise to 3.63X, its stock price would increase by $154 from the current level of $76.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, OMC is expected to continue to be a major Value Builder.
Omnicom Group’s current Price Target of $106 represents a +40% change from the current price of $76.03.
This neutral appreciation potential results in an appreciation score of 59 (41% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 59, the moderately high Power Rating of 65 contributes to an Value Trend Rating of B.
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Omnicom Group’s current Price Target is $106 (+32% from the 2018 Target of $81 and +40% from the 10/17/19 price of $76.03). This rise in the Target is the result of a +4% increase in the equity base and a +26% increase in the price/equity multiple. The forecasted increase in growth has a large positive impact on the price/equity multiple and the forecasted increase in return on equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a very slight negative impact.
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PTR’s return on equity forecast is 50.1% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, steady increase between 2010 and 2018. The current forecast is significantly above the 2010 low of 23%.

PTR’s growth forecast is 5.0% — above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well above the 2016 low of -1%.

PTR’s cost of equity forecast is 10.1% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic decline between 2010 and 2018. The current forecast is steady at the 2010 low of 9.7%.
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At Omnicom Group’s current price of $76.03, investors are placing a positive value of $17 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 45.9% versus a cost of equity of 9.8%.
PTR’s 2020 Price Target of $106 is based on these forecasts and reflects an estimated value of existing assets of $65 and a value of future investments of $42.

About John Lafferty 52629 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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