As the third largest advertising and marketing company in the world, Interpublic Group of Companies Inc. (NYSE:IPG) has managed to overcome last decade’s downward slump, in order to resurface as a profitable investment. Changes in the management team, as well as several new growth measures, have not only earned the firm a narrow economic moat rating, but also helped retrieve margins and shareholder returns. So, let’s see what likely motivated investment gurus David Tepper (Trades, Portfolio) and NWQ Managers (Trades, Portfolio) to buy this company’s stock last quarter.
Stable Client Relationships
One of the main factors in favor of this advertising firm is its strong customer loyalty. With over a hundred advertising agencies in the world, including McCann Worldgroup, Draft FCB Group and Lowe Worldwide, this firm has established itself as one of the go-to marketing options for Fortune 500 companies and international corporations. Although the advertising industry is fairly consolidated and the firm operates in the mature markets of the U.S. and Europe, its integrated combination of ad creations, brand strategy, media planning and public relations are requested all over the globe. The nature and variety of these services lead to high switching costs, as successful client-relationships take time to form and are then difficult to dissolve, without the client losing profits.
Furthermore, Interpublic collects taxes from the corporation’s marketing and advertising activity, resulting in a healthy cash-to-debt ratio. In addition to benefiting from long-lasting client relations, who outsource the majority of their marketing needs to the firm’s specialized agencies, I believe that strategic acquisitions could generate strong profits in the long term.
Management is focused on expanding into high-growth emerging markets over the next few years, and the strong presence in Brazil, Russia, India and China should be attractive to investors. However, constant fee pressure on behalf of corporations remains present, as these tend not only to engage in advertising deals with their main source, but can also reach out to other agencies. Moreover, the firm remains susceptible to an economic slowdown, as well as ongoing restructuring, which could hurt revenue and limit profits in the short term.
As the advertising scene changes, Interpublic will have to make an effort to adapt quicker, as it is currently lagging behind its main competitors, Omnicom Group Inc. (NYSE:OMC) and MDC Partners Inc. (NASDAQ:MDCA), in terms of financial results. However, the current operating margin of 9.80% is quite impressive considering 2002’s historic low point of -4.20%, and this metric is expected to continue growth until reaching 11% by 2018. Furthermore, the company’s average organic annual growth rate of 3% over the next five years should be in line with the same figure sales increase expected for fiscal 2014. But the truly tempting metrics lie in the advertising firm’s 19.4% EBITDA growth, as well as its profitable EPS boost of 70.40% recorded during 2013.
When it comes to benefiting shareholders, Interpublic’s management team has made a point of not disappointing, with returns on invested capital spiking at 134.4%, far above the industry median of 33.4%, and a solid annual dividend yield of 1.80%. Although the company’s stock is still trading at a 13.3% price premium relative to the industry average of 20.20x, I believe this price will drop over the next quarters, or at the least remain stable, making this an accurate time to buy the company’s shares.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.