Interpublic (IPG) Falling Sharply Despite Earnings Beat

Interpublic Group of Companies (NYSE:IPG) stock is taking shareholders on a roller-coaster ride. The company beat first-quarter estimates for the first time in a decade on Friday, sending IPG stock up nearly 3%. Then IPG abruptly gave all those gains back and more as the stock fell more than 4% on Monday.

Interpublic (IPG) Falling Sharply Despite Earnings BeatIPG continued its fall today, down another 1.5% in early trading on Pivotal Research’s downgrade and fears that it would be hurt by Procter & Gamble Co’s (NYSE:PG) plans to squeeze out ad agencies.

But let’s look at the good news first.

Interpublic’s fourth-quarter guidance for 2015 growth was “meh” at best, but earnings estimates were higher than expected, placing the New York-based ad and marketing company well on track to meet its 3% growth target for 2015.

Interpublic’s revenue has been on an interstellar journey for the last year, more than doubling the S&P 500. IPG’s revenue this quarter maintains that positive growth streak, showing resilience through tumultuous currency headwinds during its most notoriously underperforming quarter.

But that doesn’t necessarily mean it will continue that way for the rest of the year, and its pullback this week reminds us of that.

IPG Earnings Recap

Interpublic increased its U.S. revenue 5.7% with operating income of roughly $8 million, a welcome improvement over the $11.7 million loss posted in same quarter last year.

Europe in particular has been a recent trouble spot for IPG, but has since returned to growth, bringing total reported revenue up 2.4% despite the 4.4% headwind on currency translation.

Michael Roth, CEO of Interpublic Group, credited these results on livelier healthcare, technology, food and beverage, and retail sectors.

Though Interpublic’s earnings broke even, improving on last year’s Q1 loss of $21 million, the Big Apple firm’s net loss of $1.8 million is still playing catch-up with its competitors.

IPG is still an advertising industry leader in dividends, however, repurchasing 2.5 million shares in the last quarter, and in February it increased its dividend from 9 cents to 12 cents per share.

While the argument could be made that the $900 million drop in cash quarter-over-quarter means IPG should spend to grow, Interpublic’s total buyback cost of $51.2 million is a 7% drop in the bucket.

Petrobras Scandal

One of the bigger threats to IPG in 2015 is to its image among analysts and investors. Brian Wieser, a Pivotal Research analyst, downgraded IPG and several other ad industry stocks earlier this month due to media kickback schemes comprising a huge chunk of big ad agency profits.

Wieser argues ad agencies haven’t been as forthcoming with shareholders as they should about undisclosed agency rebates, and as awareness of these rebates increases, simply being part of a shady crowd could condemn IPG:

 “As marketers become more vocal about undisclosed rebates and more specific allegations come to light, a drumbeat of negativity will build around the sector over the course of this year. Given this risk, we’d recommend that investors move to the sidelines or exit the sector altogether while it all plays out.”

And it certainly doesn’t help IPG subsidiary FCB Brasil is now implicated in the Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) kickback scandal, comprising some $2.7 billion worth of bribes and kickbacks.

IPG’s Bet on Big Data and Analytics is Key

Roth noted the importance of digital services as “significant contributors” to Interpublic Group’s 6.1% organic revenue growth this quarter, but it’s about to lose some of that to rival Omincom Group Inc (NYSE:OMC) as Wells Fargo & Co (NYSE:WFC) plans to move its media and digital business to OMC subsidiaries.

Interpublic revenue depends on winning clients and keeping current clients contented, and the loss of WFC is disheartening. But IPG’s newest interest in Samba TV might offset that sting a bit, allowing IPG to concisely allocate its media budget through Samba’s targeted data and analytics initiatives.

Samba’s real-time data analysis could renew IPG’s confidence as a risk-taker and creative force through a better understanding of consumer behavior, allowing the ad firm to try new strategies without spending wildly.

As Forbes writer Avi Dan wrote in January:

“Big Data can inform better strategies and better consumer insight because of its robustness and the depth of input. Tighter, better-articulated strategies would lead marketers to become more comfortable with green lighting more edgy creative ideas.”

Advertising’s Rocky Future

When the world’s largest advertising says it wants to spend less on marketing, the world takes notice, which is why IPG stock is down more than 6% this month. According to The Wall Street Journal, PG is looking to shave $500 million in fees from its advertising budget, money it pays to outside firms for pitch assistance.

The troubling part of this for IPG investors is that it could be the signal of a trend, as other companies have already sworn off huge marketing budgets, such as The Coca-Cola Co (NYSE:KO) and Visa (NYSE:V), and Mondelez International Inc. (NYSE:MDLZ) is rumored to be next.

This is consistent with Friday’s earnings call, where Roth noted the pressure agencies are under to show results, and this is just the latest development in a tumultuous relationship between ad agencies and clients.

Interpublic Group is one of the four big ad firms — the others are WPP PLC, Omnicom, and Publicis — together generating roughly $50 billion in revenue, but as more budget-minded companies look to cut costs wherever and whenever they can, agencies like IPG risk eating into their margins.

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

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