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3 Ad Agencies That Are Riding the Rebound

Pure-play advertising giants are showing big gains, but only one is a best bet right now


I admire the show Mad Men. What I find most interesting about advertising is how ideas and emotions are communicated and how multibillion businesses have been built on the ability of these folks to deliver perfectly constructed messages.

With signs that the economy is coming back, now may be the time to jump into advertising stocks. I refer to companies that create advertising rather than those, such as CBS (NYSE:CBS), that sell time to advertisers.

WPP PLC (NASDAQ:WPPGY) is a diversified company that handles international media planning and buying, specialist sponsorship, and branding. It covers consumer products, public relations, public affairs, and even health care, event, sports, youth, and entertainment marketing.

The company has 40 years’ experience in the field and is considered one of the primary brand names in the sector. One would expect that as the economy improves, businesses that had cut back on advertising will up their spending, and revenues for advertising agencies will increase.

That’s exactly what appears to be happening at WPP since 2011 revenue rose 8.4%, and net income jumped 40%. Free cash flow was mammoth — $1.3 billion — spread wisely across working capital, debt repayment, acquisitions, share repurchases and dividends.

The shares are pricey at 15x estimates, but the past year’s growth of 40% might make one tempted to buy in. I can’t say it’s a bad idea, but a lot will depend on how much the economy rebounds.

Omnicom (NYSE:OMC) provides services that include advertising, marketing research, brand consultancy, media planning and buying, corporate social-responsibility consulting, mobile marketing, crisis communications, multicultural marketing, custom publishing, nonprofit marketing, data analytics, organizational communications, database management, package design, direct marketing, product placement, entertainment marketing, and promotional marketing…and that’s not even everything!

The giant’s Q4 revenue rose 7.4%, contributing to a 10.3% increase in net income. Net income for the year really took off — 23% — on a 10.6% revenue jump. Backing out the effect of a 5% decrease in shares, net income still jumped 10%. As with WPP, there’s so little in the way of capital expenditures in this business that free cash flow tells the tale.

Omnicon’s free cash flow was $1.13 billion, almost four times what it needs to pay its 2.5% dividend. With all that cash, there’s no need to pay down much of the company’s $3.2 billion in debt, and there’s $1.8 billion in cash on hand. The shares are a bit pricey, growing at 10% but trading at 14x earnings.

I’d wait for a pullback, but if you see this as a long-term hold, the balance sheet and cash flow give you a solid backstop.

The Interpublic Group of Companies (NYSE:IPG) also reported solid earnings for its diversified group of subsidiary advertising agencies. Although full-year revenue rose only 2.8% (with a 6.1% increase in Q4), net income soared by over 60% thanks to an 11.8% jump in international revenue.

IPG is in fantastic shape financially, some of which is due to a $150 million gain in the sale of the company’s holdings in Facebook. IPG has $2.32 billion in cash and $1.77 billion in debt. The company is redeeming all of its 4.25% convertible senior notes, has announced a $300 million stock-repurchase plan and has  a 2% dividend.

If you back out the $1 per share in cash on its books, IPG trades at 13.5x earnings, with five-year annualized growth estimates of 17%, suggesting the stock is undervalued by 20%. I agree.

Of the three, then, I’d scoop up Interpublic — and grab a cigarette and some booze and toast your ad-biz savvy.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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