Omnicom Group Inc. (OMC, Financial) is one of the "big five" advertising agencies globally. The company saw its revenue decline by 20% in 2020, but it recovered well in 2021. The share price has been treading water since 2014, but the company has generated attractive returns on equity over the same period. The stock is also a holding in the portfolio of one of the value investors that I like to follow, Joel Greenblatt (Trades, Portfolio), who added to his firm's position in the stock in the fourth quarter of 2021. Could this stock be set for a breakout soon? Let's take a look.
Business model
Omnicom Group is one of the largest advertising and public relations companies in the world. The company has five major agency networks which oversee a staggering 1,500 agencies. They provide services such as strategic media planning, data analytics, brand consulting and experiential marketing for some of the biggest brands in the industry. Advertising makes up over 50% of the company's revenue, with customer relationship management services the next biggest source.
Source: Omnicom investor materials
Omnicom is diversified extensively across industries from health care to food and beverages and even auto. Despite being New York-based, Omnicom is a truly global company, with 52% of revenues coming from the U.S., 10% from the U.K. and 18% from the rest of Europe.
Source: Omnicom investor materials
The company is focusing on Investments and acquisitions in faster-growing disciplines in order to maintain its edge. For instance, Omnicom recently announced a collaboration with Firework to provide livestream shopping solutions to brand websites. Livestream shopping is a rapidly growing industry and is worth a staggering $480 billion in China, but only $11 billion in the U.S. However, large tech giants are investing into the potential industry growth with Amazon (AMZN, Financial) Live, Alphabet's (GOOG, Financial)(GOOGL, Financial) YouTube Live shopping and TikTok.
Earnings rebound
Omnicom’s revenue had been hovering around $14 to $15 billion over the past few years prior to 2020. However, in 2020, the company saw its revenue decline by 20% as advertisers pulled their ad budgets due to the pandemic. Those temporary headwinds resulted in a large share price decline, but also offered a great "buy the dip" opportunity as the stock price quickly rebounded by 78%.
In 2021, revenue recovered to pre-pandemic levels. Net income came in at $1.4 billion for the year, up 10% compared to 2019. The company’s balance sheet remains healthy with over $5 billion in cash and maintainable long-term debt of an equivalent amount.
Omnicom currently pays a solid 4% dividend. The company’s diversified revenue base should mean this is maintainable for at least the near future. Even if the company isn't really growing much, at least it offers some shareholder returns.
Valuation
In terms of valuation, the GF value line gives the stock a rating of fairly valued. During the fourth quarter of 2021, shares traded at an average price of $71 per share, 9% below the price of $78 as of the writing of this article. I think that investors interested in this stock might have missed the bus here.
Omnicom is one of the world's largest advertising companies and has a global client network of top brands which are diversified across industries. The company saw its revenue decline in 2020 due to the pandemic, but this has quickly rebounded back to stability. A 4% dividend makes it ideal for dividend investors, but I would personally be waiting for a pullback below $71 per share in order to give a margin of safety when investing due to the limited growth potential.
