Friday, 29 August 2014

Omnicom - as interesting as a WPP chart suggested?

Earlier in the week I posted on the advertising giant WPP and noted their use of this chart in their presentation document:


Of the larger caps /  the lowest value name is Omnicom, so let's take a look.  

First, the chart over the last year is pretty instructive given the big event of earlier this year was the break-up of the merger with Publicis.  Kind of easy to spot when the deal broke up...


Clearly this was a huge disruption.  Interesting that WPP gave a full break down of contract wins/losses but I could not see an obvious trend in losses, indeed Omnicom won the SAP account in the last couple of months from WPP.  
 Looking at the numbers ebita pushed forward even if operating margins were slightly down...


...interestingly the slowest growth came from the emerging markets although as the organic growth numbers showed (as the WPP numbers showed too) the negative impact of exchange rates around the world (when translated back into Sterling/US dollars).

Cash flow was solid and, as noted below, the company continued to use their free cash flow to pay a dividend and buyback stock.  On a company EV of just over US$20bn this equates to an annualised free cash flow of around 8% with just under 4% coming back to shareholders via a dividend or the buyback.
As for the general valuation the company is around x10.5 EV/ebita.  

Pulling it all together these sort of multiples are quite interesting to me.  However it is interesting that WPP - the world leader and slightly more emerging market / digital focused - trades on a not dis-similar multiple and that on a relative performance basis it has underperformed Omnicom:


So I am looking for below 1200p in WPP and less than US$68 to buy an initial position in Omnicom.  There is a correlation with GDP but at these sort of general metrics position initiation makes some sense.  

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