shippensburg university investment management program
TRANSCRIPT
Shippensburg University
Investment Management Program
Buy Omnicom Group Inc. (NYSE:OMC) 10.13.2020
Current Price Fair Value 52 Week Range
$52.86 $75.58 $46.37-82.79
Analyst: Christian Hennel
Email: [email protected] Target Price: $79.64
Sector: Communication Services Stock Type: Mid Value
Industry: Media (Advertising) Market Cap: $11.35B
Company Overview: Omnicom Group Inc. is a global network of marketing communications companies headquartered in New York City. Omnicom’s networks provide advertising, customer relationship management (CRM), public relations, and healthcare marketing services to over 5,000 clients in over 100 countries. Their customer portfolio includes well-known corporate clients including Apple, Adidas, McDonald’s, Nissan, PepsiCo, Pfizer, & Exxon Mobil. Omnicom is the world’s second-largest advertisement holding company by revenue and currently maintains over 70,000 employees worldwide.
Executive Summary: Omnicom Group Inc. has experienced immense historical success from December 2011 to December 2019. During this time frame, OMC stock price raised 81.74% along with growing their annual dividend payment by 70%. OMC’s success can be directly attributed to steady revenue, net income growth, and a consistent payout ratio to reward shareholders. OMC’s financial performance was a result of industry dominance, prolonged macroeconomic success, and their impressive portfolio of corporate customers. The COVID-19 pandemic has drastically impacted Omnicom’s financials and business model. The pandemic has destroyed OMC’s demand as businesses slash marketing and advertising spending. The advertising industry, as seen through historical data, is also extremely sensitive to macroeconomic factors including GDP growth, consumer confidence, and the unemployment rate. COVID-19 has decimated macroeconomic conditions and therefore Omnicom’s stock price has plummeted. This report will demonstrate that Omnicom’s current stock price is a fantastic opportunity to buy at a significant undervaluation. OMC is primed for a comeback as the company maintains a strong economic moat and economic outlook improves.
Key Stock Statistics Revenue (TTM) $13.97B
Operating Margin (TTM) 11.5%
Net Income (TTM) $939M
EPS (TTM) $4.29
Operating Cash Flow (TTM) $1.49B
Free Cash Flow (TTM) $1.75B
Return on Assets (TTM) 3.94%
Return on Equity (TTM) 38.95%
P/E 12.46
P/B 4.76
P/S 0.83
P/FCF 7.83
Beta (5-Year) 0.68
Dividend Yield 4.86%
Projected 5 Year Growth 3.2%
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Contents Company Overview ................................................................................................................................. 3
Business Segments............................................................................................................................. 3
Advertising ........................................................................................................................................ 3
Customer Relationship Management ............................................................................................ 3
Public Relations ............................................................................................................................... 3
Healthcare ......................................................................................................................................... 4
Investment Thesis ................................................................................................................................... 4
Key Fundamentals & Economic Drivers ........................................................................................... 4
Communication Services Sector ................................................................................................... 4
Media & Advertising Industry ......................................................................................................... 4
Company Specific Factors ............................................................................................................. 5
Fundamental Analysis ........................................................................................................................ 6
Revenue ............................................................................................................................................. 6
Profitability & Payout Policy ........................................................................................................... 6
Liquidity ............................................................................................................................................. 7
OMC vs. Competition ....................................................................................................................... 7
Valuation of OMC ................................................................................................................................. 8
Discounted Cash Flow (DCF) Model ............................................................................................. 8
Technical Analysis ........................................................................................................................... 8
Risks.......................................................................................................................................................... 9
Internal Risks ....................................................................................................................................... 9
External Risks ...................................................................................................................................... 9
Recommendation .................................................................................................................................. 10
References ............................................................................................................................................. 11
Appendix A ............................................................................................................................................. 12
Appendix B ............................................................................................................................................. 15
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Company Overview Omnicom Group Inc. was formed as a holding company in 1986 for three independent advertising networks including the BBDO Worldwide Network, the DDB Needham Worldwide Network, and the TBWA International Network. These 3 subsidiary agencies were vital in attaining notable corporate clients including PepsiCo and the U.S. Navy. The late 1980s were filled with lackluster financials causing investors to doubt the effectiveness of the OMC merger. The 1990s resulted in immense change as Bruce Crawford was appointed CEO. Crawford implemented managerial layer reduction and selective customer investments as revenues skyrocketed to $2.3B by 1995. Omnicom continued to grow opening offices in Latin America, Asia, and South Africa by the end of the 1990s. The 2000s brought about many challenges as technology became more prevalent in the advertising and marketing industries. OMC steadily grew their customer base and services portfolio throughout the 2000s reaching $9.7B in revenue by 2004. By 2006, the company was one of the world’s top advertising groups by revenue. OMC spent the 2010’s investing in digital media, customer relationship management (CRM), and focusing on large corporate customers. By 2014, Omnicom was the second largest agency holding company and had revenue of over $15B. Omnicom continues to invest in top corporate customers, developed nations, and proprietary digital media technology. The company remains the second largest advertising company in the world by revenue today.
Business Segments Omnicom offers a plethora of services through business segments that include advertising, CRM consumer experience, CRM executions & support, public relations, and healthcare marketing. The graph below displays Omnicom’s yearly revenue by each business segment.
*OMC Revenue by Business Segment
The previous graph demonstrates each business segment’s contribution to yearly revenue. The following section of the report will detail each of OMC’s segments with a brief description, contribution history, and outlook.
Advertising The advertising segment was the highest revenue producer in 2019. Advertising includes creative services, data analytics services, and strategic media planning. The segment accounted for 56.5% of 2019 revenue contributing $8.45B. Only 5 companies, including Omnicom, account for 30% of global advertising revenue. OMC maintains a dominant control over advertising demand with the largest corporate customers and $9.5B in intangible assets. These assets are key protection against new industry entrants and include brand recognition, patents, copyrights, and trademarks. Advertising has been hit hard by the COVID-19 pandemic and is an important aspect of 2020 revenue decreases. Advertising outlook remains positive as Omnicom further invests into data analytics and macroeconomic outlook brightens. OMC’s advertising segment will be discussed in-depth throughout this report.
Customer Relationship Management The customer relationship management (CRM) segment was the second highest revenue producer. The customer relationship management segment includes both consumer experience and executions & support. This segment accounted for 26.6% of 2019 revenue contributing $3.97B. Consumer experience consists of a precision marketing group, digital agencies, branding, and shopper marketing. Executions & support consists of field marketing, sales support, merchandising, and other specialized marketing. Overall, the goal of the CRM segments is to manage the company’s relationships with customers through streamline processes. Omnicom’s CRM revenue has been declining since 2016 and the outlook for this segment is negative as CRM organic revenue growth was hit hard in Q1 2020.
Public Relations The public relations segment includes services like corporate communications, crisis management, public affairs, and media relations services. Public relations accounted for 9.2% of total 2019 revenue contributing $1.38B. Public relations revenue growth has been stagnant since 2016 and decreased year over year in 2019. The outlook for public relations is negative due to historical stagnancy and organic growth reaching a low of 1.7% in Q1 2020.
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Healthcare The healthcare segment includes all advertising and media services to global healthcare clients. The healthcare segment accounted for 7.7% of 2019 revenue contributing $1.15B. Omnicom’s healthcare segment maintains the highest revenue in the advertising industry and has increased revenue every year since 2016. Historical performance indicates a positive outlook for OMC’s healthcare segment.
Investment Thesis This section of the report will provide an overview analysis of OMC’s stock. The analysis will contain key economic drivers, company specific finances, a valuation of Omnicom’s stock using a discounted cash flow (DCF) model, and a technical analysis evaluation.
Key Fundamentals & Economic Drivers The following sections will discuss the primary drivers affecting Omnicom Group. These drivers include detailing how the communication services sector and media/advertising industry are subject to macroeconomic changes that affect company specific factors. Each of these drivers has a major impact on the success of OMC but are not an entirely comprehensive list.
Communication Services Sector The communication services sector includes companies that provide fixed-line, cellular, wireless, high bandwidth, and fiber optic cable communication networks. Omnicom fits into this sector as a global network of leading marketing communications companies. Communication services has been a historically cyclical sector. This means the sector generally matches market fluctuations.
*Sector vs. S&P 500 10-Year The graph above demonstrates Omnicom’s cyclical nature and it’s mirroring of market, in this case the S&P 500, changes over the past 10 years. Historical data also shows that the communication services sector tends to have return discrepancies during difference stages of the business cycle.
*Sector Historical Business Cycle Performance The chart above displays the sector’s performance during the early expansion, mid expansion, late expansion, and recession stages of the business cycle. The U.S. is currently projected to be in the recession stage as COVID-19 ravages the economy. United States GDP decreased 31.7% on an annualized basis and the unemployment rate rose to 11.1% in Q2 2020. The communication services sector returned -24.16% at the height of this economic uncertainty. Economic data has started to rebound as GDP forecasts have improved and the unemployment rate lowered to 7.9% in September. The sector has also begun to rebound with a 10.89% return over the past 3 months. According to historical data, the communication services sector is a prime candidate for long-hold investments as the U.S. enters early expansion.
Media & Advertising Industry The media industry has undergone immense changes in recent history. The media industry includes 4 sub-industries including advertising, broadcasting, publishing, and cable & satellite. Each of these sub-industries has faced uncertainty as technological innovation continues. Advertising companies have had to transition from traditional marketing services to mostly digital features and data analytics. Broadcasting has been neglected as more people flock to movie, television, and music streaming services. Cable & satellite have fallen victim to similar changes as cable TV and satellite providers are ditched for cheaper and more convenient streaming services. Publishing is faced with problems as digital media becomes more available and maintains lower margins than traditional publishing. Each sub-industry derives their revenue from advertising, customer subscriptions, pay-per-item products, and merchandising products. These sub-industries all face a similar problem of relying on advertising revenue. Advertising revenue is the main driver of each media sub-industry’s financials as TV, radio, newspapers, books, newspapers, and digital articles all rely on outside companies investing in advertisements. The advertising sub-industry relies the most on outside companies investing in advertising as they operate as either a creator or market maker for these advertisements. The media industry, and especially the advertising sub-industry, clearly rely on advertisement spending which is extremely subject to macroeconomic changes. Businesses tend to spend money during economic expansion periods where GDP is growing, and the unemployment rate is low. The largest decrease in all these macroeconomic metrics have been during the 2008
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financial crisis and the 2020 pandemic induced recession. The 2008 financial crisis brought a 4.3% GDP contraction and a 10% unemployment rate. The 2020 pandemic induced recession resulted in a 31.7% annualized GDP contraction and an unemployment rate as high as 14.7%. These recessions were not localized to the United States and resulted in recessions across the globe.
*YoY Change in Global Advertising Spending The graph above displays the year over year change in global advertising spending from 2000 to 2020 and projects into 2022. The graph shows advertising spending is reduced heavily during uncertain economic time periods. After 2008-2009 advertising spending rebounded heavily and statistica.com projects the 2020 recession will result in a similar rebound.
Top 5 Media Advertising Company’s Stock Price 2008*
Top 5 Media Advertising Company’s Stock Price 2020* The previous charts show the 5 largest advertising company’s stock prices, including Omnicom, during the 2008 and 2020 recessions. A correlation between stock price and economic downturns reducing advertising spending can clearly be observed. Statista’s projections indicate the recent pandemic induced recession will see advertising costs boosted soon and media/advertising stock prices may start yielding high returns. Based on historical data, the media industry may benefit from increased advertising spending when the economy rebounds.
Company Specific Factors Omnicom Group is extremely sensitive to macroeconomic factors on the communication services sector and media/advertising industries. Revenue may largely depend on macroeconomic metrics, but Omnicom is affected by numerous company specific factors. OMC includes data analytics in advertising revenue. Data analytics and the sale of data is a valuable commodity in the present digital age. Statista projects the big data applications and analytics market will grow from $5.3B in 2018 to $19.4B in 2026. Omnicom is aware of this potential market as they unveiled the data tracking software “Omni” in 2018. Omni is a proprietary software that allows customers to dynamically track personalized marketing analytics. Omnicom’s access to data may be emphasized if the big data industry continues projected growth. OMC is also influenced by company acquisition opportunities. OMC has acquired 4 companies in the last 4 years and 21 companies all time. In 2019, Omnicom acquired a majority stake in Smart Digital GmbH to strengthen AI marketing techniques. These acquisitions are a part of Omnicom’s strategy to maintain a dominant market share as 58% of acquisitions have targeted media and 24% have targeted marketing. Omnicom was positioned to merge with the marketing agency Publicis in a $35B deal in 2014. The deal would have made the conglomerate the largest marketing communications
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agency in the world with combined revenues of $22.7B. Though the deal fell through, the enormous merger attempt shows Omnicom has no constraints when it comes to acquisitions. OMC is well positioned to make acquisitions as they sit on $3.28B in cash as of Q2 2020 and the coronavirus ravages smaller firms in the industry.
Fundamental Analysis This following section of the report will analyze Omnicom Group through several financial metrics. These metrics include revenue, profitability & payout policy, liquidity, and an overall comparison of OMC to its competition. OMC’s income statement, balance sheet, and statement of cash flows can be found in Appendix A.
Revenue
*OMC Revenue Growth Metrics Since 2006 Omnicom Group has grown revenue every year from 2010 to 2019. OMC has also maintained high levels of revenue per asset dollar with an asset turnover ratio of 0.59. Revenue declined year over year in 2019 primarily due to negative foreign exchange rates from foreign investments and a decrease in acquisition revenue. Both factors decreased 2019 revenue by 2.2% from the previous year. Revenue in Q2 2020 was $2.8B compared to $3.72B in Q2 2019. This heavy revenue decline in 2020 is due to the extreme macroeconomic collapse caused by COVID-19. The pandemic induced recession has decimated advertising, OMC’s largest revenue source, and CRM demand as businesses cut spending. Despite the recent revenue declines, OMC maintains a 10-year compounding annual growth rate in revenue of 2.5%. Macroeconomic outlook looks positive as unemployment rates drop and GDP contraction stabilizes. An improved economic outlook is a strong indicator that revenue will regain growth in 2021. Omnicom has made the necessary investments in data analytics and continues to actively acquire rival companies to retain market share. Healthcare has also been a major contributor to revenue growing 23% from 2017 to 2019. The healthcare segment also posted a 2.3% year over year increase in organic growth for Q2 2020. Healthcare revenue is expected to
continue growth as a health conscience world post COVID-19 may incur higher marketing demands. Overall OMC has had historically successful revenue numbers and the outlook for revenue growth is positive.
Profitability & Payout Policy
*OMC Net Profit Growth Metrics Since 2006 Omnicom has an extremely impressive track record of profitability. OMC maintains 5-year averages of 47.4% return on equity and 39% return on assets. Omnicom is generated high rates of profitability for every dollar of shareholders equity and every dollar of assets. Net income has also grown 61.71% from 2010-2019. Net income has experienced sharp declines in 2020 due to overall revenue reduction. This can be seen in net profit margin metrics which have maintained the same historical growth and decreased far less in 2020. OMC has historically produced large amount of profit to be available to shareholders and the future is promising as economic outlook improves. OMC is slashing payroll costs to improve margins. OMC subsidiary BBDO Worldwide laid off two of its top executives. The OMC executive leadership team is also sacrificing a 33% pay cut.
*OMC’s Payout Metrics Since 2013 OMC’s profitability directly translates to shareholder wealth through payout policy. The company has increased their yearly dividend payment every year since 2010 with a yearly average growth rate of 6.54%. Omnicom currently pays a dividend yield of 4.86% beating the industry average of 2.23%. OMC also executes stock repurchases on a regular basis to reward shareholders.
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Stock buybacks further shareholder wealth and bring OMC’s total current payout yield to 7.5%. Since 2010 OMC has used stock repurchases and dividend payments to maintain a payout ratio over 40% every year. Omnicom Group has demonstrated a history of producing profit through efficient use of assets and shareholder dollars. The company has extensive experience rewarding shareholders through payout policy. Omnicom’s future profitability and payout outlook are extremely positive as economic data improves.
Liquidity Omnicom Group upholds average financial health. Liquidity will be immensely important to OMC due to economic cycle sensitivity. Omnicom will have to outlast competition until advertising and marketing demand increase as the economy recovers from recession. OMC maintains a debt to equity ratio of 2.86 as of Q2 2020. This ratio means OMC relies heavily on debt to finance operations. Typically, a debt to equity ratio of above 2 means a company is relying too heavily on debt. OMC also carries a current ratio of 0.94. A current ratio value below 1 means the company does not have enough short-term capital to pay financial commitments when the payables are due. The company also has nearly $11.84B in fixed and intangible assets which are extremely illiquid. On the surface Omnicom appears to be in a dangerous liquidity position and at immediate risk as the recession continues. Upon further analysis, OMC has maintained much healthier debt to equity ratios of 1.88, 1.72, and 2.03 in 2017, 2018, and 2019 respectively. Only in 2020 did debt to equity emphatically increase by 40% year over year. OMC also added significant firepower to their balance sheet in Q1 and Q2 of 2020. The company has a $2.5B revolving credit facility, an additional $400M revolving credit agreement, and a $600M senior note offering. The newly issues notes have a Baa1 credit rating by Moody’s indicating only a moderate credit risk. OMC also maintains $3.28B of cash on their balance sheet as of Q2 2020. Overall, OMC has nearly $6.78B of liquidity and no notes maturing until May 2022. The company also continues the previously mentioned payroll and salary cuts to reduce operating costs. This means Omnicom can utilize their newly acquired debt and cash to finance short-term obligations and prepare for a recovery in demand.
OMC vs. Competition Omnicom Group’s financials matchup well with competition. The media advertising industry is dominated by 5 major players that control 30% of global revenues. 2 of these major players operate in similar economies as Omnicom and make ideal competitive comparisons. The other 2 major players are Interpublic Group with a market capitalization of $7.05B and WPP plc with a market capitalization of $10.45B.
*OMC & Competition Revenue:Employee Ratio
*OMC & Competition Operating Profit Margins The first graph above shows OMC’s revenue to employee ratio over the past 10 years compared to its two major competitors. The revenue to employee ratio demonstrates how financially productive the company is for each employee. The ratio is a measure of both efficiency and profitability. The graph shows clear dominance by OMC as they have outpaced their competitors every year and have continued a solid upward trend. The second graph above once again demonstrates OMC’s operational efficiency and profitability through operating profit margin. OMC has shown steady operating profit margin growth over the past 10 years demonstrating streamlined operations and efficient management. OMC’s recent dip in operating profit margin does not consider the recent furloughs and layoffs the company has implemented to decrease operating costs.
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*OMC & Competition EPS The display above shows OMC’s earnings per share, or EPS, over the past 10 years compared to competitors. EPS is a major indicator of profitability and OMC soars above its fiercest competition. OMC has shown a tremendous steady growth of earnings per share even with the recent 2020 decrease. EPS can be a direct measure of stock success as OMC pays these earnings out to shareholders in dividends.
*OMC & Competition Cash on Hand Cash on hand is a direct measure of liquidity and is simply a term for how much cash a business has readily available for any purpose. The chart above shows cash on hand for OMC and its competition dating back to Q4 2006. Omnicom has clearly been accumulating cash over the past 14 years at a steady pace. OMC now has the most cash among competitors which will be vital for withstanding the current recession and preparing for future investments.
Valuation of OMC The valuation of OMC will be determined primarily through a discounted cash flow model. This specific discounted cash flow model will be a 3-stage free cash flow to the firm (FCFF) model and can be found in Appendix B. The outcome of this model will be reinforced through a technical analysis evaluation using several different indicators.
Discounted Cash Flow (DCF) Model This DCF model is a 3-stage FCFF model. The model’s goal is to first estimate the fair value of the firm and then subtracting the market value of debt to derive the value of equity. The inputs to the model assume OMC’s EBIT, or operating income, will grow by 4.44% per year for the next 5 years before gradually decreasing to the terminal growth rate of 1.77% in year 11. The 4.44% EBIT growth rate is derived from OMC’s 10-year average growth rate. The 1.77% growth rate is derived from OMC’s 5-year average growth rate. The 10-year average growth rate encompasses 2010 to 2019 which was a period of strong macroeconomic growth. The 5-year average growth rate encompasses a time period of slowing macroeconomic growth as global GDP growth began to wane. The WACC, or weighted average cost of capital, is derived using a cost of debt of 3.97%, a cost of equity of 8.21%, and weighting each through market capitalization and total debt. These inputs result in a low WACC of 7%. The terminal WACC is a projected 8% as OMC’s recent debt offering added $600M in senior notes. This debt issuance is projected to take effect in mid-2022. The model’s result was a fair value of $75.58. This valuation is a 42.98% undervaluation compared to OMC’s current market price.
Technical Analysis Omnicom’s technical analysis evaluation will be through simple indicators including a relative strength index, a moving average, and Bollinger Bands.
*OMC RSI & Moving Average
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The previous chart displays OMC’s 5-month simple moving price average along with OMC’s relative strength index. The moving average is a trend indicator based on price movement and history. Whenever stock price begins to move above the moving average, a bullish buy signal is indicated. Whenever stock price begins to cross below the moving average, a bearish sell signal is indicated. This month has seen OMC’s price begin to eclipse it’s 5-month simple moving average indicating a strong buy signal. The relative strength index is also indicating OMC is currently oversold. The relative strength index, or RSI, is a momentum indicator that oscillates between 0-100. Anything below 30 is consider oversold and a buying opportunity for investors. Anything above 70 is considered overbought and a selling opportunity for investors. OMC’s RSI crossed below 30 in September and remains relatively low. This is a strong buy signal.
*OMC Bolling Bands Bollinger Bands are a volatility indicator that use the standard deviation of price movements. The Bollinger Bands above use a 20-month simple moving average and plot 2 trendlines that are 2 standard deviations away each. The lower trendline is 2 positive standard deviations away and indicates negative volatility when stock price crosses below. When the stock price crosses back above the lower trendline, this is considered a strong buy signal. The upper trendline is 2 negative standard deviations away and indicates a sell signal when stock price crosses above. OMC stock price crossed below the lower trendline in April and crossed back above the lower trendline in June. This was a strong buy signal and OMC price remains in solid Bollinger Band position. Overall, our technical analysis indicators show bullish signals in price trends, momentum, and volatility. This view reinforced our DCF findings that OMC is a buy.
Risks Omnicom maintains relatively low systemic risk with a current 5-year Beta of 0.68. This is well below the market Beta of 1. OMC also has an investment grade credit rating of BBB+, per S&P ratings, indicating only moderate risk levels. Despite this, OMC does have internal and external risk factors that must be considered.
Internal Risks The most problematic internal risk to OMC is client retention. Omnicom derives nearly half of its revenue from its 100 largest clients. The clients are typically large well-known corporations including Apple, Nissan, and PepsiCo. OMC has a record of long-term client retention and many intangible assets that few other groups could match. Despite this, COVID-19 complications may sway large corporate customers to search for cheaper options or ditch outsourced marketing. OMC must maintain their client relationships through the pandemic and dissuade relationship severance. OMC may also face internal risks as debt payments are due. OMC has a solid amount of cash on hand, but its balance sheet is loaded with debt. If OMC does not start to regain revenue and profit, then debt payments may be a problem as note maturities become due in May 2022.
External Risks Omnicom is faced with numerous external risks. These risks include economic risk and political risk. OMC’s most important risk, as mentioned multiple times throughout this report, is economic risk. OMC’s sector, industry, and sub-industry have all been linked to directly correlate with macroeconomic factors. OMC’s revenue and profitability have both been directly correlated to economic drivers and outlook. The valuation of OMC is entirely based on an economic recovery soon. The United States could slip into a “double-dip” recession due to lack of stimulus or further economic shutdowns. Another round of economic uncertainty could cause a liquidity crunch for OMC as short term obligations add up and revenue continues to decline. Political risk must also be considered when investing in OMC. The presidential election in the United States is in full swing and each candidate has very different ideals. Mr. Biden intends to raise the corporate tax rate from 21% to 28%. A Biden win and tax plan incorporation would further heighten OMC’s already high effective annual tax rate of 30.6% (Q2 2020). President Trump intends to keep corporate tax rates at current lows. A Trump win would benefit OMC’s effective annual tax rate and allow room for improved deductibility. Tax rates are extremely important to companies like OMC that maintain high net income and the election results in November 2020 come with significant political risks.
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Recommendation I recommend OMC should be purchased for the portfolio.
OMC is immensely sensitive to economic changes due to its sector, industry, and core business segments. Recent economic turmoil has caused revenue and net income decreases. Proper use of debt and operating cost cuts will ensure enough liquidity to weather the recession. When economic conditions improve soon OMC is primed to rejuvenate revenue growth and profitability. These metrics will be driven by OMC’s fantastic client portfolio, dominate market share, and a possible entrance into the big data industry. OMC’s fundamentals remain strong beating competition in profitability, efficiency, and liquidity measures. OMC will also maintain, if not increase, payouts to shareholders through dividends and stock buybacks. All these factors should lead to exponential stock price growth in the long-term.
OMC is undervalued by 42.98% with a fair price of $75.58. This valuation again projects EBIT will maintain comparable growth to historical data during prosperous economic times. This valuation is also backed by technical analysis evaluation showing bullish signals in price trends, momentum, and volatility.
OMC does face client retention risk, debt risk, economic risk, and political risk. Customer relationships may alter during the COVID-19 era and a large portion of OMC’s client portfolio may disassociate. Debt is not a short-term issue but may become a problem in the long-term as senior notes become due. OMC must properly manage customer relationships and debt payments to have future success. OMC is also subject to huge economic risk as stimulus hopes stall and a double dip recession is possible. The Presidential election may also bring uncertainty as corporate tax rates are a major debate. A Joe Biden victory may bring increased tax rates taking away from profitability and shareholder wealth.
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References
www.morningstar.com
www.discoverci.com
www.finbox.com
www.gurufocus.com
www.tradingview.com
www.omnicomgroup.com
www.trefis.com
www.forbes.com
www.fundinguniverse.com
www.statista.com
www.adweek.com
www.sec.gov
www.craft.com
www.marketbeat.com
www.macroaxis.com
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Appendix A
Income Statement
Report Date 12/31/2019 12/31/2018 12/31/2017 12/31/2016 12/31/2015
Currency USD USD USD USD USD
Audit Status Not Qualified Not Qualified Not Qualified Not Qualified Not Qualified
Consolidated Yes Yes Yes Yes Yes
Scale Thousands Thousands Thousands Thousands Thousands
Revenue 14953700 15290200 15273600 15416900 15134400
Salary & service costs 10972200 11306100 11249700 11453200 -
Occupancy & other costs 1221800 1309600 1232100 1218000 -
Net gain on disposition of subsidiaries - -178400 - - -
Cost of services 12194000 12437300 12481800 12671200 -
Salary & service costs - - - - 11361900
Office & general expenses - - - - 1852400
Selling, general & administrative expenses 405900 455400 450000 443900 -
Depreciation & amortization 231500 264000 282100 292900 -
Operating expenses 12831400 13156700 13213900 13408000 13214300
Operating profit 2122300 2133500 2059700 2008900 1920100
Long-term debt 194600 201600 201600 205500 210200
Commercial paper 6500 9600 12500 6800 4800
Interest rate swaps 6100 5200 -7200 -13100 -53300
Amortization of deferred gain on interest rate swaps -14800 -12900 -12900 -15400 -
Fees 4700 5600 5600 5600 5700
Pension & other interest 47200 57300 - - -
Other interest expense - - 24900 20300 13700
Interest expense 244300 266400 224500 209700 181100
Interest income 60300 57200 49700 42600 39600
Income before income taxes - domestic 913100 643700 832400 805200 803300
Income before income taxes - international 1025200 1280600 1052500 1036600 975300
Income before income taxes & income (loss) from equity method investments1938300 1924300 1884900 1841800 1778600
Current federal income tax expense (benefit) 180200 273800 458800 381800 342300
Current state & local income tax expense (benefit) 33900 35500 36500 12600 29900
Current international income tax expense (benefit) 306900 305200 280200 332100 324500
Total current income tax expense (benefit) 521000 614500 775500 726500 696700
Deferred federal income tax expense (benefit) 19100 -104200 -205500 -88200 -86700
Deferred state & local income tax expense (benefit) -22500 2800 11100 12000 12100
Deferred international income tax expense (benefit) -13200 -20400 115100 -49800 -38500
Total deferred income tax expense (benefit) -16600 -121800 -79300 -126000 -113100
Income tax expense (benefit) 504400 492700 696200 600500 583600
Income (loss) from equity method investments 2000 8900 3500 5400 8400
Net income (loss) 1435900 1440500 1192200 1246700 1203400
Less: net income attributed to noncontrolling interests -96800 -114100 -103800 -98100 -109500
Net income - Omnicom Group Inc. 1339100 1326400 1088400 1148600 1093900
Net income allocated to participating securities - 100 1600 6500 12400
Net income available for common shares 1339100 1326300 1086800 1142100 1081500
Weighted average shares outstanding - basic 219800 226600 232300 237900 244200
Weighted average shares outstanding - diluted 220900 227600 233900 239200 245200
Year end shares outstanding 217100 223900 230100 234700 239700
Net income (loss) per share - basic 6.09 5.85 4.68 4.8 4.43
Net income (loss) per share - diluted 6.06 5.83 4.65 4.78 4.41
Dividends per common share - 2.4 2.25 2.15 2
Total number of employees 70000 70400 77300 78500 74900
Number of common stockholders 1953 2014 2074 2138 2194
Foreign currency translation adjustments 74900 -319100 412700 -319400 -427200
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Balance Sheet
Report Date 12/31/2019 12/31/2018 12/31/2017 12/31/2016 12/31/2015
Currency USD USD USD USD USD
Audit Status Not Qualified Not Qualified Not Qualified Not Qualified Not Qualified
Consolidated Yes Yes Yes Yes Yes
Scale Thousands Thousands Thousands Thousands Thousands
Cash & cash equivalents 4305700 3652400 3796000 3002200 2605200
Short-term investments, at cost 3600 5500 400 20600 14500
Accounts receivable, gross 7850500 7692900 8115900 7535700 7243400
Less: allowance for doubtful accounts 21500 26800 32100 24900 22500
Accounts receivable, net 7829000 7666100 8083800 7510800 7220900
Work in process 1257600 1161500 1110600 1125400 1122700
Other current assets 1188800 1241400 1125200 1063000 1017200
Total current assets 14584700 13726900 14116000 12722000 11980500
Property, plant & equipment, gross 1806200 1879400 1970100 1908200 1899300
Less: accumulated depreciation 1142800 1185000 1279200 1233400 1206600
Property & equipment 663400 694400 690900 674800 692700
Operating lease right-of-use assets 1398300 - - - -
Equity method investments 106800 120900 120300 120400 136600
Goodwill 9440500 9384300 9337500 8976100 8676400
Intangible assets, gross 1097400 1120200 1248300 1205000 1025500
Less: accumulated amortization - intangible assets 759200 737400 879900 777600 680700
Intangible assets, net 338200 382800 368400 427400 344800
Other assets 251500 307700 298100 244700 279700
Total assets 26783400 24617000 24931200 23165400 22110700
Accounts payable 11768400 11464300 11574600 10476700 9812000
Customer advances 1215300 1159000 1266700 1186600 1283500
Current portion of debt 602400 499600 - 100 1001400
Short-term debt 10100 8100 11800 28700 5200
Taxes payable 252800 180600 330000 349600 319100
Other current liabilities 2131900 1958600 1925800 1969200 1798400
Total current liabilities 15980900 15270200 15108900 14010900 14219600
Senior notes 5122800 4900000 4900000 4900000 4500000
Other debt - - - 100 300
Long-term debt before current portion 5122800 4900000 4900000 4900100 4500300
Unamortized premium (discount), net 800 4900 6200 7600 10100
Unamortized debt issuance costs -20000 -16400 -20300 -24200 -16900
Unamortized deferred gain from settlement of interest rate swaps 30700 48000 66400 84700 -
Fair value adjustment attributed to outstanding interest rate swaps - -52800 -39400 -47600 -
Adjustment to carrying value for interest rate swaps - - - - 72100
Subtotal 5134300 4883700 4912900 - -
Less: current portion 602400 499600 - 100 1001400
Long-term debt 4531900 4384100 4912900 4920500 3564200
Long-term liabilities 1006800 1197800 1091200 892300 800500
Long-term liability - operating leases 1274700 - - - -
Deferred tax liabilities 408100 413700 483600 480500 469100
Temporary equity - redeemable noncontrolling interests 207300 244300 182400 201600 167900
Common stock 44600 44600 44600 44600 59600
Additional paid-in capital 760900 728800 828300 798300 859900
Retained earnings 7806300 7016100 6210600 5677200 10178200
Cash flow hedge -24000 -22300 -26300 -29500 -3300
Unrealized gain (loss) on available-for-sale securities - - -300 -800 -900
Defined benefit pension & postemployment arrangements -112100 -69300 -88400 -90600 -87900
Foreign currency translation -1061500 -1136900 -848000 -1235100 -923300
Accumulated other comprehensive income (loss) -1197600 -1228500 -963000 -1356000 -1015400
Treasury stock, at cost 4560300 4013900 3505400 3002100 7629900
Total shareholders' equity 2853900 2547100 2615100 2162000 2452400
Noncontrolling interests 519800 559800 537100 497600 437000
Total equity 3373700 3106900 3152200 2659600 2889400
14
Statement of Cash Flows
Report Date 12/31/2019 12/31/2018 12/31/2017 12/31/2016 12/31/2015
Currency USD USD USD USD USD
Audit Status Not
Qualified
Not
Qualified
Not
Qualified
Not
Qualified
Not
Qualified
Consolidated Yes Yes Yes Yes Yes
Scale Thousands Thousands Thousands Thousands Thousands
Net income (loss) 1435900 1440500 1192200 1246700 1203400
Depreciation & amortization of right-of-use assets 147700 - - - -
Depreciation - 161500 168300 177700 181800
Amortization of intangible assets 83800 102500 113800 115200 109300
Amortization of deferred gain on interest rate swaps -14800 -12900 -12900 -15400 -9200
Share-based compensation 72500 70500 80200 93400 99400
Net loss (gain) on disposition of subsidiaries - -178400 - - -
Impact of Tax Act - 28900 106300 - -
Excess tax benefit from share-based compensation - - - -21200 -27200
Deferred gain from settlement of interest rate swaps - - - 54200 50400
Deferred loss from settlement of forward-starting interest rate swap - - - -54500 -
Other adjustments, net 5800 29200 27500 12100 6800
Accounts receivable -156600 88300 -341600 -376500 -1063600
Work in process & other current assets -99800 -269300 5400 -89700 -74700
Accounts payable 276300 242900 763200 741900 1443700
Customer advances, taxes payable & other current liabilities 87200 54300 4800 - -
Customer advances & other current liabilities - - - 36300 203900
Other assets & liabilities, net 18000 -35700 -83300 11000 48300
Operating capital 125100 80500 348500 323000 557600
Net cash flows from operating activities 1856000 1722300 2023900 1931200 2172300
Capital expenditures -102200 -195700 -156000 -165500 -202700
Acquisition of businesses & interests in affiliates, net of cash acquired-10000 -350400 -26300 -308800 -60300
Proceeds from disposition of subsidiaries 79400 308400 - - -
Sale (purchase) of short-term investments, net - - 66900 -7300 -
Proceeds from sale of investments & other investing activities 1900 15900 - - -
Other cash flows from investing activities, net - - - - -500
Net cash flows from investing activities -30900 -221800 -115400 -481600 -263500
Change in short-term debt - - -18100 -1200 -1100
Proceeds from borrowings 1112400 - - 1389600 -
Repayment of debt -900000 - - -1000000 -
Change in short-term debt 2000 - - - -
Dividends paid to common shareholders -564300 -548500 -515200 -505400 -496700
Repurchases of common stock -610200 -581300 -568400 -602200 -727500
Proceeds from stock plans 6500 13000 10700 26800 20100
Acquisition of additional noncontrolling interests -51400 -43600 -17000 -72700 -33500
Dividends paid to noncontrolling interest shareholders -97300 -134900 -101700 -87200 -129400
Payment of contingent purchase price obligations -64600 -99000 -108400 -110500 -55300
Excess tax benefit from share-based compensation - - - 21200 27200
Other financing activities, net -55100 -46800 -24500 -35500 -32900
Net cash flows from financing activities -1222000 -1441100 -1342600 -977100 -1429100
Effect of foreign exchange rate changes on cash & cash equivalents 50200 -203000 227900 -75500 -262600
Net increase (decrease) in cash & cash equivalents 653300 -143600 793800 397000 217100
Cash & cash equivalents at the beginning of year 3652400 3796000 3002200 2605200 2388100
Cash & cash equivalents at the end of year 4305700 3652400 3796000 3002200 2605200
Income taxes paid 361000 590900 566000 570400 540100
Interest paid 246300 243200 226200 216700 173900
15
Appendix B
WACC Calculation
Cost of Debt Calculation
Interest Expense 248,300,000 Total Debt 4,542,000,000 28.58%
Short Term Debt 10,100,000 Market Capitalization 11,350,000,000 71.42%
Long Term Debt 4,531,900,000 Total 15,892,000,000 100.00%
Cost of Debt 5.47%
Income Tax Expense 504,400,000
Income Before Tax 1,938,300,000 WACC 7.00%
Tax Rate 27.47%
Cost of Debt * (1-T) 3.97%
Risk-Free Rate 4.42% Long Term Average Yield on 10-Year T-Bonds
Beta (5-Year) 0.68
Market Return 10% Long Term Average Historic Market Return
Cost of Equity 8.21%
Cost of Equity Calculation
Weight of Debt & Equity Calculation
WACC Calculation
WACC Calculation
16
FCFF Model
Valuation Inputs
Trailing Twelve Month (TTM) Data High Growth Projections Terminal Projections
Total revenue 13,972,600,000 Expected growth rate 4.44% 10-Year Average Expected growth rate 1.77% 5-Year Average
Earnings Before Interest and Taxes 1,602,400,000 Length of high growth phase 10 Reinvestment rate 9.27%
Net working capital 1,396,200,000 Reinvestment rate 9.27% Cost of capital 8.00%
NWC as a % of revenue 9.99% Cost of Capital 7.00% Tax Rate 27.47%
Tax Rate 27.47% TTM
Present Value of Discounted Future Cash Flow
Period 1 2 3 4 5 6 7 8 9 10 Terminal Year
Expected Growth Rate 4.44% 4.44% 4.44% 4.44% 4.44% 3.91% 3.37% 2.84% 2.30% 1.77%
Cumulated Growth 104.44% 109.08% 113.92% 118.98% 124.26% 129.11% 133.47% 137.26% 140.42% 142.90%
Reinvestment Rate 9.27% 9.27% 9.27% 9.27% 9.27% 9.27% 9.27% 9.27% 9.27% 9.27%
EBIT 1,673,546,560 1,747,852,027 1,825,456,657 1,906,506,933 1,991,155,841 2,068,930,388 2,138,694,720 2,199,390,877 2,250,064,842 2,289,890,990
Tax rate (for cash flow) 27.47% 26.18% 25.53% 24.88% 24.24% 23.59% 22.94% 22.29% 21.65% 21.00% 21.00%
EBIT * (1 - tax rate) 1,213,823,320 1,290,334,281 1,359,435,827 1,432,129,878 1,508,599,223 1,580,911,088 1,648,056,765 1,709,058,675 1,762,993,306 1,809,013,882 1,841,033,428
CapEx-Depreciation 50,471,584 54,808,046 58,335,805 62,068,784 66,018,250 78,723,079 91,940,238 105,511,104 119,259,329 132,994,347 141,211,537
Chg. Working Capital 61,991,280 64,743,693 67,618,313 70,620,566 73,756,119 67,766,365 60,786,920 52,885,655 44,153,140 34,701,240 29,452,261
Free Cashflow to Firm 1,101,360,456 1,170,782,542 1,233,481,709 1,299,440,528 1,368,824,854 1,434,421,644 1,495,329,607 1,550,661,915 1,599,580,837 1,641,318,295 1,670,369,629
Cost of Capital 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
Cumulated Cost of Capital 1.07 1.14 1.23 1.31 1.40 1.50 1.61 1.72 1.84 1.97
Present Value 1,029,309,662 1,022,608,452 1,006,890,918 991,340,131 975,957,109 955,820,298 931,221,344 902,505,132 870,072,259 834,369,672
Valuation Results Margin of Safety
Value at the end of growth phase 26,811,711,544 Value of equity per share 75.58
Present Value of FCFF in high growth phase = 9,520,094,975 Margin of Safety 15%
Present Value of Terminal Value of Firm = 13,629,823,674 Value of equity per share 64.24
Value of operating assets of the firm = 23,149,918,649 Current stock price 52.86
Net debt (6,900,000,000) % Under or Over valued 21.54%
Value of Equity 16,249,918,649
Total shares outstanding 215,000,000
Value of equity per share 75.58
Current stock price 52.86
% Under or Over valued 42.98%