INTERPUBLIC GROUP OF COS IPG
June 18, 2010 - 9:28pm EST by
sag301
2010 2011
Price: 8.32 EPS $0.65 $0.80
Shares Out. (in M): 489 P/E 12.8x 10.0x
Market Cap (in $M): 4,000 P/FCF 13.0x 9.0x
Net Debt (in $M): 160 EBIT 475 550
TEV ($): 4,420 TEV/EBIT 9.3x 7.5x

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Description

 

At $8.32 per share IPG trades at less than 12.8x adjusted LTM earnings (adj to exclude excess severance), 10x peak earnings and less 8x earnings power under a recovery in the advertising industry and operating at 10-12% margins. IPG has a very strong balance sheet with more than $2 per share in excess cash.  Recently IPG has begun to use it balance sheet to the benefit of share holders (by retiring $265mm of  convertible preferred.

 

 

Interpublic Group of Companies ("IPG") is the 3rd largest advertising holding company in the world.  IPG generates revenue world wide from traditional advertising (58% of revenue) and marketing services (42% of revenue).   Traditional advertising consist of brand building, TV, radio, print and media buying; Marketing services consists of market research, public relations, direct marketing, digital, promotions and event marketing.  IPG's agencies include:  McCann Erickson, Jack Morton, Draftfcb, Lowe Worldwide, MAGNA Global and others.  IPG's revenues are 56% US and 44% international, mostly Europe and Japan. The ad business is very good when operated at sufficient scale because it requires little capital, and is naturally structured manage inflation (revenue scale without capital spend) or manage down turns (most cost is staff that can be released).  So the ad business produces significant free cash.

 

Revenue Drivers - Client wins/(losses) and client spending.  60/70% of traditional advertising business is fee based.  Media buying tends to be commission based.

 

Cost Drivers - Employees (60% of revenue), Operations and Facilities (30% of revenue)

 

 

IPG has a $1.8bn NOL (worth $600mm).  The NOL is over 2/3 international, so mostly it is not available to offset US profits.  The US has remained profitable through the company's turnaround.  IPG will need to improve results in Europe and Japan in order to fully realize the NOL benefits.

 

 

Recent History-

IPG has operated at below industry margins since 2002.  IPG lagged the industry's growth from 2002-2007.  IPG's operating woes were largely self inflicted.  IPG expanded rapidly from 1996-2001, making 400 acquisitions (including formula 1 race tracks and entertainment facilities in Europe) that helped take revenue from $2.5bn to $6.7bn and made IPG the largest advertising holding company in the world. 

            IPG did a poor job of integrating and managing the rapid growth of 1996-2001.  In 2002 IPG discovered accounting irregularities and restated financials.  IPG did not have adequate systems, procedures or people to manage all of the agencies and entities that had been acquired.  IPG was also incapable of tracking and managing costs.

 

Turnaround -

New management was appointed in 2005 (Michael Roth as CEO and Frank Mergenthaler as CFO).  During 2004 and 2005, IPG ramped up professional spending to help restate previous financial filings, prepare future filings, and establish adequate controls and procedures - the company spent over $300mm per year on such expenditures.  IPG reduced legal entities from 1,575 in 2003 to 800, reduced sq. footage from 15.1mm to 13.8mm (11.1mm used 2.7mm subleased), consolidated agencies and shut offices.  

New management established performance metrics around revenue growth and margins and compensated accordingly.  Costs have shrunk steadily as a % of revenues.

 

 

IPG became SARBOX compliant at year end 2007.  In  2008, IPG paid $12mm to the SEC to resolve previous accounting issues.  In 2007, IPG begun demonstrating improved results - organic revenue growth and margin improvement.  Just as IPG appeared to have turned the corner operationally, the economy fell apart, taking ad spending down and forcing IPG to layoff people resulting in above normal severance payments and declining margin.

 

Despite considerable improvement, IPG still operates at roughly 65% of the industry's average EBIT margin. 

IPG can drive tremendous shareholder value by achieving industry like margins over the next 3-4 years.  Given IPG's demonstrated turnaround success, management continuity and commitment, there is no clear reason the company will not achieve peer level margins. 

Catalyst

ad recovery - use of b/s for buyback of convertible debt, preferred and common
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