When economic growth starts to pick up, Omnicom Group Inc. (NYSE:OMC) might be one of the first companies to know. Advertising budgets typically get cut once businesses start encountering trouble, and rebound once they start believing that there is more customer demand to be satisfied. When enough businesses start coming to the same conclusion, it shows up at advertising agencies like Omnicom- explaining why the stock tends to react more strongly than the broader market, with a beta of 1.5. That statistical relationship has roughly held over the last year: the S&P 500 up 26%, Omnicom’s stock up 35%.
In the second quarter of 2012, Omnicom Group Inc. reported a slight increase in global revenue, as a strong quarter in the U.S. (responsible for a little over half the company’s business) offset declines in international markets. Net income edged up slightly as well compared to a year earlier, with share count dropping off a bit, and as a result the company reported $1.02 in earnings per share compared to 96 cents in the second quarter of 2012. Omnicom’s first quarter was also a bit better than the same period in 2011, with the result being EPS of $1.74 in the first half of 2012, a 5% improvement. At a market capitalization of $14 billion, Omnicom carries a trailing P/E of 15. Its forward P/E, which assumes that the company will hit $3.65 in earnings per share this year and then beat that figure by 10% in 2013, is 13. Our impression is that the economy would need to pick up in order to achieve that growth rate, and the company would need to continue buying back shares as well.
Omnicom Group Inc. was one of JHL Capital Group’s favorite stocks during the second quarter, as the fund dramatically increased its position to a total of 1.4 million shares. In terms of market value, it was the third largest position in JHL’s 13F portfolio (see more stock picks from JHL Capital). First Eagle Investment Management, meanwhile, owned 8.4 million shares at the end of June (find more stocks owned by First Eagle Investment Management). Ariel Investments, managed by John Rogers, cut its stake but still owned about 750,000 shares (research more investment activity at Ariel Investments).
The two best peers for Omnicom are Lamar Advertising Co (NASDAQ:LAMR) and Interpublic Group of Companies, Inc. (NYSE:IPG). Lamar has doubled in price since a year ago, and even though earnings have risen a bit as well the company is still valued at 65 times forward earnings estimates. We don’t think that its recent growth rates- revenue was up only 4% in the second quarter over the same quarter last year- justify that kind of a multiple, though we’d note that the company’s possible conversion to an REIT in the near future may complicate the analysis. Interpublic Group, meanwhile, is a considerably better value at trailing and forward P/Es of 11 and 12, respectively. Its business has been about flat over the last year, in contrast to Omnicom or Lamar, which explains why it is trading at a discount. We’re curious as to how industry dynamics are driving its underperformance versus Omnicom; if the two businesses can grow at the same rate from this point (not that we necessarily expect that), Interpublic Group would prove a better value.
Omnicom can also be compared to WPP PLC (NASDAQ:WPPGY) and Focus Media Holding Limited (NASDAQ:FMCN). Focus Media is a tougher story: it is the target of a potential buyout by the Carlyle Group, but the Chinese company (which displays LCD ads in public areas in China) has been under siege from short sellers who question the accuracy of the company’s financials. Many Chinese companies have been forced to restate earnings or cease trading as a result of accounting fraud in the past few years. Given the company’s numbers, it trades at 17 times trailing earnings with analyst expectations implying a forward P/E of 8. Ireland-based WPP’s business has been up recently- both revenue and earnings increased last quarter compared to the same period a year ago- but is expected to decline in 2013, likely because of continued problems in Europe. Its market cap represents a 13x multiple in trailing earnings but a 16x multiple on analyst consensus for next year. We would prefer Omnicom, as its business looks more stable.