Omnicom's Global Arm Makes it a Steal, Says one Money Manager

Omnicom Group (OMC), the New York City advertising-agency holding company, is currently undervalued and a “steal” of a buy, according to Steve Roukis, managing director and senior portfolio manager at New York’s Matrix Asset Advisors.

According to Roukis, the only reason Omnicom’s stock has been down in the last 12 months is because investors worry that companies will cut their advertising revenue as the economy slows. He said “momentum investors” used this logic when exiting the stock, but that even in the “worst case scenario,” Omnicom’s slump would likely only last another few months. While Roukis said it’s true that companies will cut back on advertising spending during a recession, “Omnicom is a global company, and they have some tremendous new business wins,” he said.

Roukis said that Omnicom had grown 10-15% per year for the last 20 years. “Even if their clients cut back, it means that instead of [Omnicom] growing at 13%, they will grow at 5%,” noted the money manager.

In the last 12 months, the stock has gone from around $60 to its current $44.11. Roukis said Omnicom is growing faster than its peers, and the company had proven “aggressive” during downturns by cutting back on cost structure and spending. Even during economic downturns, they have reported double-digit growth because they have more leeway than the smaller companies to cut costs, according to Roukis.

Roukis said Omnicom stock is currently trading at 13 times earnings, though it usually trades at 18 times. “We like this current valuation,” he said. “These guys are the world’s premier global advertising agency, and they are ranked number one every year. They are much bigger than their peers, and every quarter they get new billings, and continually grow their market share. Each year they seem to outgrow everyone else in the industry.”

Omnicom is seeing the continued benefits of having large global clients, Roukis noted. “Clients like Pepsi and Johnson & Johnson are going to stick with the large media agencies, even in times of recession. Big companies want to send one simple message to all media outlets, and [Omnicom] does this,” said Roukis.

With many large companies “going digital,” and focusing their advertising dollars on the Internet, smaller advertising agencies will struggle to keep up with giants like Omnicom, according to Roukis. “We’re going to see the bigger advertising companies get bigger, and the small guys fade away,” he said, adding that Omnicom supplies a “better mousetrap” and “better management team.”

Roukis said Omnicom should grow at double-digit rates over the next three to five years, at 10%-13% per year. Roukis added that although no one can predict the market, he didn’t think Omnicom’s stock price would get any lower.

“You never know how low they will go, but if it’s not the bottom right now, then it’s pretty close to the bottom.We feel we’re already seeing the lowest price,” he said.

Roukis pointed out the company had been buying its own stock back “very aggressively.” Because Omnicom is global, it is more insulated from U.S.-based economic downturns, Roukis said. “They are doing more overseas business all the time. It’s the advertising agencies that are based in the U.S. that are the greatest risk,” he said. “As far as advertising agencies go, [Omnicom] is blue chip, and trading at a ridiculous valuation level. I’d say once a decade the stock will sell down at these levels.”

Roukis compared Omnicom to a “safe bluechip stock along the lines of Procter & Gamble.” Roukis said the stock would see close to a 50% upside appreciation, and that its valuation would be back to 18 times earnings within a year or two.

“If you look at its historical valuations, you’ll see that we’ll be looking at a $65 stock in the next three to five years. [Omnicom] has a clean balance sheet with less than $1 billion in debt. They have strong equity positioning, strong cash flow, and more than a billion in free cash flow every year. That’s why we like them,” he said.