As I said in the MY INVESTMENT PHILOSOPHY page on this site, I do not consider myself a GROWTH investor nor do I consider myself to be a VALUE investor. I keep reading and researching about different business and industries in an attempt to find those which I believe would make good long-term investments whether or not they fit into GROWTH of VALUE buckets. I have always been fascinated by advertising/marketing, and if my love for finance and investing weren’t so strong, I would have probably tried my hand at marketing.
Bearing this in mind (and the rather obvious catch-line above), this post takes a look at advertising and marketing behemoth OMNICOM GROUP INC. (NYSE: OMC, the “Company”)
From the Company’s website:
“Omnicom is an inter-connected global network of leading marketing communications companies. Our portfolio provides the best talent, creativity, technology and innovation to some of the world’s most iconic and successful brands. We offer a diverse, comprehensive range of marketing solutions spanning brand advertising, customer relationship management (CRM), media planning and buying services, public relations and numerous specialty communications services to drive bottom-line results for our clients.”
Lets take a look at some KPIs for OMC shall we:
First, a look at the good stuff above:
OMC was able to successfully grow its top line by nearly 4% per year over the past five years. A deeper look into the components of that top-line growth and we see that it was mostly organic in nature, as the firm was able to grow the business without a significant boost from acquisitions, by an average of 5% annually. Management should be commended on this feat.
When looking at investing in an ‘asset light’ business like advertising/marketing, an important KPI to consider is Average Revenue Per Employee. While small, Average Revenue Per Employee increased by an average of 1% annually over the past five years. While I would have liked to know how many of the Company’s employees are actually “client facing” to get a more refined metric, the 1% overall change is not bad.
New business (organic and via M&A) combined with good cost control has allowed the Company to boost its EBITDA margin by an average of 5% annually to an impressive 15%.
Net income and Diluted EPS
Each of the above good…even better that most of the revenue growth (and as such related profits) in each of the past five years under review was organic. Good job OMC!
Average annual growth of 20% p.a for the past five years is nothing to sneeze at…even if one were to consider the dividend boosting power of the average 4% yearly decline in shares outstanding. OMC has never reduced its dividends since its founding in 1986.
CFO, ROE and ROA
Each good: strong and growing cash generation (CFO exceeded Net Income in each of the five years under review); pretty good ROA and impressive ROE growth (buybacks played a big part in this).
Diversification of revenues
OMC has thousand of clients which operate in virtually every business sector one can think of (at least 10 according to its 2015 Annual). Largest sector exposure was Food and Beverage at approximately 13% of revenues. Additionally, the Company’s 10 largest clients on average accounted for less than 20% of revenue in each of the past five years, and its largest client accounted for less than 3% of total revenues over the same period. I am quite comfortable with this level of diversification. Geographic diversification is not too shabby either (N.B. the U.S. advertising market is the world’s largest according to recent statistics).
Unfortunately, there are some negative in my analysis which I must point out:
The Company’s JAWS ratio (income growth rate – expenses growth rate) was more or less non-existent over the past five years as top line revenue growth of 3.8% was met with operating expense growth of 3.6% over the same period.
Share buybacks boosted EPS
OMC bought back an average of 4% of its outstanding shares each year over the past five years. However, stripping out this benefit still leaves strong EPS growth over each of the years under review.
Leverage, coverage ratios
RED…not what I like to see when evaluating a company as a potential investment. The only mitigating (slightly) factors are double-digit coverage ratios, and I use the term ‘slightly’ since the Company’s coverage ratios have been more or less flat over the past five years, and the fact that the Company’s fairly regular and what I would consider to be sizable buybacks influence these figures (i.e. leverage).
Unfortunately, OMC is not cheap: its changing hands for about 19 times trailing earnings, offers a current dividend yield of about 2.49%, and is up about 17% YTD. However, I believe the company makes an excellent long-term hold for the investor looking for a well-run business in an attractive industry with potential for both share price appreciation and dividend growth (I believe the POSITIVES highlighted above outweigh the NEGATIVES). Given the year’s run-up in price however, I would dip my toes in first and then buy on pull-backs.
What do you think of Omnicom Group Inc?