Omnicom Group, Inc. Takes a Cautious Look Ahead

By Steve Symington Markets Fool.com

Shares ofOmnicom Group(NYSE: OMC)declined 3% Tuesday after the marketing and communications specialist announced first-quarter 2017 results, punctuated by modest organic growth and continued macroeconomic and geopolitical headwinds.

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But Omnicom is happy with its performance. The company doesn't typically provide financial guidance, but management noted during the subsequent conference call that revenue exceeded their internal estimates. So let's take a closer look at how Omnicom kicked off the year, as well as what investors can expect going forward.

IMAGE SOURCE: GETTY IMAGES

Omnicom Group results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Growth

Revenue

$3,587.4 million

$3,499.1 million

2.5%

Net income (available for common shares)

$241.3 million

$216.9 million

11.2%

Net income per common share (diluted)

$1.02

$0.90

13.3%

DATA SOURCE: OMNICOM GROUP, INC.

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What happened with Omnicom Group this quarter?

  • Revenue growth was comprised of 4.4% organic growth -- which excludes currencies, acquisitions, and divestments -- a 0.7% decline in revenue from acquisitions, and a 1.2% headwind from foreign currency exchange.
  • Organic revenue growth included a 6.4% increase from advertising, 2.1% growth from CRM, 1.8% growth from public relations, and 3.3% growth from specialty communications.
  • On a geographic basis, organic revenue climbed 1.1% in North America, 8.1% in the United Kingdom, 8.2% throughout Europe, 9.1% in Asia-Pacific, 5.4% in Latin America, and 37.9% in the Middle East and Africa.
  • Earnings before interest, taxes, and amortization of intangibles (EBITA) rose 4.7% to $440.3 million.
  • Net debt at the end of the quarter was $2.457 billion, including $4.943 billion in total debt and cash and investments of $2.486 billion.
  • Quarterly free cash flow was $355.3 million.
  • Acquired a majority interest in U.K.-based creative agency Lucky Generals through TBWA Worldwide.
  • Omnicom extended its streak of returning more than 100% of net income to shareholders through dividends and repurchases.

Omnicom's net cash returned to shareholders through dividends and share repurchases. IMAGE SOURCE: OMNICOM GROUP, INC.

What management had to say

During this quarter's conference call, Omnicom CEO John Wren stated:

While our revenue growth exceeded our internal targets for the quarter, we remain cautious as numerous geopolitical and macroeconomic events remain unresolved.In the U.S., it is still isn't clear how legislation in several major areas including the budget, tax reform, infrastructure spending and healthcare could impact the economy. And the U.S.'s relationship with several key international trading partners is also being tested by the new administration.In Europe, the combination of Brexit and the upcoming general elections in France and Germany may lead to policy shifts in those countries. In Asia and the Middle East, the situation in North Korea is increasingly unsettling and the crisis in Syria continues to destabilize both the Middle East and Europe. In the face of these macro events, Omnicom's agencies remain focused on the things they can control, developing their talents, delivering results for their clients and driving improvement in their financial results.

Looking forward

Omnicom once again declined to provide formal financial guidance. But CFO Philip Angelastro did suggest that, based on the company's most recent projections, foreign exchange is expected to negatively impact revenue by 2.2% in the second quarter, and by roughly 1.2% for the full year. Of course, that's a very rough estimate given the current unsteady state of the markets in which Omnicom operates.

But in the meantime, with shares trading roughly flat over the past year, investors will need to trust that Omnicom will continue doing everything it can to solidify the competitive position of its agencies, continuously improve its business, and seize the opportunities within its control. When these headwinds abate, Omnicom should be better positioned to succeed and create value for its shareholders.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Omnicom Group. The Motley Fool has a disclosure policy.