IPG Reports Organic Revenue Growth of 2.2% in the Second Quarter



Interpublic reported organic revenue growth of 2.2% in the second quarter, on par with the first quarter as the company rebounds from client losses in 2012. With expected clients wins starting to flow through in the third quarter, the firm is on track to meet its 2%-3% organic revenue growth forecast for 2013. Interpublic is battling a tough macroeconomic environment, especially in Europe, where it noted a drop-off in business in June, naming Germany, France, and Italy specifically. Interpublic and peers Omnicom OMC and WPP WPPGY have benefited from stock price appreciation over the past six months.

The firm generated 3.5% organic sales growth in the United States, an improvement from 0.5% growth in the first quarter. The growth rate is improving now that the company has finished lapping client losses and will start to benefit from new client wins in the second half of the year. For reference, larger peer Omnicom reported organic sales growth of 2.7% in the U.S. yesterday.

Interpublic is gaining market share in Latin America and losing some in Asia Pacific. Interpublic’s trailing 12-month operating margin of 9.6% was down from 9.8% in the prior two quarters. However, we expect about 40 basis points of margin improvement (a bit less than management’s forecast of 50 basis points) in 2013, with the flow-through of new client business lifting margins.

Management’s main long-term goal is to push its long-term profitability to industry-competitive levels, which implies closer to 13% by 2015. Our forecast assumes the company falls short of this operating margin goal but still shows some improvement toward 11.5% over the next few years. The company continues to repurchase shares, and in the first six months of 2013 it has spent $180 million at an average price of around $13, which is below our estimate of intrinsic value. The company has $400 million remaining in its stock-buyback authorization.

Interpublic manages the digital portion of its business by bringing in talented people through more of an openarchitecture approach to technology. Interpublic is interested in partnering with the portion of technology (often software) that it doesn’t build or own itself. Digital strategy is integral in every agency and embedded in each marketing approach. Based on conversations with our institutional clients, some investors have a perception that WPP is materially ahead of Omnicom and Interpublic in terms of digital expertise and digital revenue growth. In our opinion, if there is an expertise or resources gap between WPP and peers Omnicom and Interpublic, WPP has a small advantage at best. WPP, Omnicom, and Interpublic are each capable of serving the digital needs of their clients. Still, we are on the lookout for any signs of a material separation in expertise.

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