Market uncertainty is a value investor’s best friend, because buying quality companies when they’re down increases the potential for outsized long-term gains. Indeed, quality companies usually have the reputation and the resources to help them get through temporary slowdowns, in some cases, come out even stronger.
This brings me to Interpublic Group of Companies (New York Stock Exchange: IPG), whose stock has experienced significant weakness since the start of the year, with a return of -23% since January 1. In this article, I highlight what makes this a great opportunity to layer on that quality stock while it’s down, so let’s get started.
IPG is an S&P 500 company and is the 4th largest of the Big 5 global advertising conglomerates. Its revenue stream is roughly evenly split between marketing services (i.e. public relations, brand consulting) and advertising and media services, including television, radio and radio. online advertising. IPG is home to a number of global brands, including Acxiom, FutureBrand, FCB, Craft and Golin, to name a few.
IPG has expanded its moat and scale in recent years, shifting its business model from traditional advertising to a holistic solutions provider, offering public relations, consulting and digital services. This was facilitated by its acquisition of data solutions provider, Acxiom, in 2018.
Additionally, IPG has a long-standing reputation as an agile and enterprising company. This quality has served it well, especially during the outbreak of COVID in 2020, when IPG was able to quickly adapt its business model to the “new normal”, focusing on e-commerce and digital services.
Meanwhile, IPG seems to be overcoming recent social media challenges that meta-platforms (META) have seen quite well. This is reflected in IPG’s revenue growth of 4.7% year-over-year (7.9% on an organic basis) in the second quarter to $2.4 billion. This growth is explained by strong organic revenue growth of 8.3% in the United States and 7.1% internationally. As shown below, Latin America and Europe both recorded organic growth of over 8%, despite the disruptive effects of the conflict in Ukraine.
It should be noted, however, that IPG is no stranger to cost inflation, as its personnel expense ratio, which is calculated as total salaries and related expenses as a percentage of salary, has increased to 66.9% in the second quarter, compared to 65.4% in the prior year period. This development is explained by increases in base salaries and additional hiring to support revenue growth.
Although this had an impact on IPG’s Adjusted EBITA margin (IPG bears little to no fixed asset amortization), with a landing at 15.6% in the second quarter, management expects profitability to improve in the second half of the year, guiding 16.6% adjusted EBITA for the full year.
Looking ahead, I see Netflix’s (NFLX) recent announcement that it is considering an ad-supported model as a plus for ad giants such as IPG. It could also indicate a broader evolution of streaming companies to look more like traditional media companies. Additionally, Morningstar expects IPG to continue to grow through acquisitions and expanding its presence in digital advertising, as noted in its recent analyst report:
IPG has evolved from traditional advertising to a full-service provider with digital and other services, such as public relations and consulting. We expect IPG to continue its strategy of growth through acquisitions in order to gain traction in other faster growing international markets. The globalization of businesses in various verticals has increased the demand not only for vertical-specific advertising expertise, but also for experience, knowledge and a better understanding of different cultures and regulations.
We expect IPG to continue to acquire and invest in the growing digital advertising space. Clients of IPG and its peers are allocating more advertising dollars to offline or more targeted digital campaigns, creating growth opportunities for agencies like MRM/McCann and IPG’s Matterkind. IPG has made progress in providing different components of digital advertising such as programmatic media buying and ad placement, as well as data analytics and performance measurement services.
Meanwhile, IPG sports a strong BBB-rated balance sheet and pays an attractive dividend yield of 4.0% which is well covered by a payout ratio of 44%. The dividend also comes with a 5-year CAGR of 11.2% and 9 consecutive years of growth.
I see value in IPG at the current price of $29.02 with a forward PE of 10.7, well below its normal PE of 15.7 over the past decade. Morningstar has a fair value estimate of $35 and sell-side analysts have a consensus buy rating with an average price target of $33.87, implying potential for double-digit total returns over the course of next year.
Key takeaway for investors
Overall, I think IPG is a high quality advertising agency that is well positioned to capitalize on the continued growth of the industry. It is enjoying healthy growth in the United States and internationally, and its digital segment offers promising potential. With a dividend yield of 4.0% and plenty of room for growth, I think IPG is a great choice for income-oriented investors looking for exposure to the advertising sector.