Top Reasons to Invest in Omnicom Group

In this article, let's take a look at Omnicom Group Inc. (OMC, Financial), a $18.88 billion market cap company that owns the DDBWorldwide, BBDOWorldwide and TBWAWorldwide advertising agency networks and more than 100 marketing and specialty services firms.

Diverse agency

Taken into account product or geography, it is the largest advertising agency in the world by revenues. With more than 1,500 subsidiary agencies, operating in over 100 countries, the company holds hundreds of agencies ranging from media buying to public relations. For example, BBDO and DDB are well-recognized agencies throughout the world. An important characteristic is that the three global networks can retain dissatisfied clients by switching them from one to another.

Competition

Although the firm faces strong competition from rivals which have replicated the business model, Omnicom has a solid revenue growth and profitability. This was achieved because of the decisions from the management team, led by CEO John Wren. His experience has made the firm achieve good results in very different economic environments.

Global reach

The company´s operations are in several regions of North America, the U.K., Europe, the Middle East, Africa, Latin America, the Far East and Australia. Last year, more than half of 2013 revenues were derived from the U.S., almost 30% from Europe and 15% from international markets.

New technology

The new technology as well as consumer preferences could change the future of marketing. So it is a must that the firm could adapt to those new inventions and trends.

Revenues, margins and profitability

Looking at profitability, revenue growth by 7.42% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.95 vs $0.74). During the past fiscal year, the company increased its bottom line. It earned $3.72 versus $3.61 in the previous year. This year, Wall Street expects an improvement in earnings ($4.21 versus $3.72).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 31.36% which is higher than the industry median and its peers Interpublic Group of Companies (IPG, Financial), Harte-Hanks (HHS, Financial), Clear Channel Outdoor Holdings (CCO, Financial) and AirMedia Group (AMCN, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 18.5x, trading at a discount compared to an average of 68.3x for the industry. To use another metric, its price-to-book ratio of 6.2x indicates a premium versus the industry average of 2.4x while the price-to-sales ratio of 1.3x is above the industry average of 1.32x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $22,596, which represents a17.7% compound annual growth rate (CAGR).

Final comment

The firm had several years of strong sales growth, so continuing with this expansion could be difficult. However, we expect a scenario of corporate spending on advertising and marketing that will increase in the upcoming future.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Scott Black (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Bill Nygren (Trades, Portfolio) and John Rogers (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned