Interpublic Group Posts Strong Q4 Results but Cautious About 2023 Growth; Shares Fairly Valued

Senior Equity Analyst

Ali Mogharabi

Interpublic Group is one of the global Big Five advertising holding companies along with Dentsu, Omnicom, Publicis, and WPP. The firm has maintained its market position following the COVID-19 pandemic as it continues to make acquisitions and increases its focus on faster-growing emerging markets and the overall digital ad market. The firm has demonstrated consistent operating margin expansion through cost controls during the past five years, which we expect to continue through the next few years.

IPG has transitioned from traditional advertising into a complete solutions provider with digital and other services, such as public relations and consulting. The firm further diversified its revenue in 2018 as it acquired data solutions provider Acxiom. We look for IPG to continue its acquisition growth strategy to gain further traction in other faster-growing international markets. Globalization of businesses in various verticals has increased demand not only for vertical-specific advertising expertise, but also for experience, knowledge, and a clearer understanding of different cultures and regulations.

We expect IPG to continue making acquisitions and investing to capture growth in the digital advertising market. Clients of IPG and its peers are allocating more ad dollars toward more targeted digital campaigns, creating growth opportunities for agencies like IPG’s MRM/McCann and Matterkind. IPG has made headway in providing different components of digital advertising such as programmatic media buying and ad placement, along with data analytics and performance-measurement services.

Business Strategy & Outlook

We view IPG as a narrow-moat company. IPG holds valuable intangible assets, in our view, around the holding company’s brand equity and the strong reputations of its various advertising agencies around the world. We also think its continuing investments in consumer data accumulation and analysis give the company a maintainable competitive advantage. We believe the utilization of its moat source and overall execution will result in IPG earning excess returns on capital for at least the next 10 years.

IPG is the world’s fourth-largest ad holding company, based on annual revenue. Through various acquisitions, the firm has transitioned from traditional advertising, which includes print, broadcast and cable television, billboards, and mail, into a complete solutions provider by combining traditional with digital (including mobile, online video, social media, and data analytics), along with other services such as public relations. IPG provides its services worldwide, with over 75% of its revenue coming from more developed regions such as the U.S. and Europe.

Advertising firms provide various services to help businesses market their products and brands more effectively. The services include the design and creation of advertising content, in addition to its distribution and placement through various channels. Ad firms also manage the campaigns that they help their clients launch. This includes not only working with various mediums to purchase media and place the ads, but also tracking the effectiveness of the ads by gathering data and measuring the return on investment.

Consolidation in the fragmented advertising industry has resulted in five companies generating nearly 30% of the world’s total ad revenue. In our view, three factors drove this space toward consolidation: globalization, the emergence and growth of digital media, and more cost-control initiatives taken by clients.

Globalization of businesses in various verticals has increased demand not only for vertical-specific advertising expertise, but also for experience and clearer understanding of different cultures and regulations within the geographic regions in which businesses want to market and sell their products. For this reason, IPG and the other largest ad holding companies have consistently acquired smaller local ad agencies and quickly gained traction in other international markets.

This consolidation can also be viewed as somewhat of a hedge against revenue volatility, as IPG’s revenue is driven mainly by macroeconomic factors, such as overall GDP growth, consumer confidence, and growth in disposable income, which influence businesses’ decisions regarding the size of their ad and marketing budgets. The status of these factors varies at different times in different regions. While North America and Europe remain the most attractive markets for ad agencies and are usually highly correlated from a macroeconomic standpoint, other regions--such as Asia-Pacific, Latin America, and Middle East and Africa--grow at slightly faster rates when in the growth stage. In addition, they are not as highly correlated in terms of when the peaks and troughs of their economic cycles take place. While revenue from those regions accounts for only around 23% of IPG’s total revenue, the company's presence in those areas can be viewed as a hedge against revenue volatility.

The emergence and growth of digital media, which has brought a more targeted marketing and advertising platform, has also driven increased consolidation in the ad space, as IPG and its peers have acquired various smaller agencies that focused on the growing digital advertising niche. As most of the ad holding companies’ larger clients and Fortune 500 firms favor omnichannel or multichannel marketing and advertising campaigns, these acquisitions help make the ad holding companies platform-agnostic and one-stop shops, unlike the smaller competitors.

Larger clients’ cost-reduction steps have forced the Big Five to further consolidate to create cost efficiencies. While most Fortune 500 companies continue to demand creative and effective ad campaigns, they would also like to simplify the process of campaign design and launch by reducing the number of agencies with which they work for various components of their campaigns, which may include not only ad creation and media buying but also public relations. As a result, continuing consolidation has helped the Big Five provide a complete advertising solution to various clients around the world and benefit from growing digital ad platforms such as social media, mobile, and video.

While significant consolidation has taken place, IPG will continue to operate as a holding company, allowing the acquired agencies to maintain their reputations under their own brands. In addition, its reputation and brand allow it to compete mainly with the rest of the Big Five for the largest accounts. When seeking ad agencies to create and manage large campaigns, the Fortune 500 companies allow only a few ad companies to pitch their ideas. This is where the reputation and brands of the Big Five come into play, as the known associated agencies are typically asked to pitch and compete for the account or a specific campaign. In our view, this recognition, which can be interpreted as stemming from high brand value, is shared by the Big Five. 

IPG and the rest of the Big Five also benefit from intangible assets in the form of consumer data, which they accumulate by managing and tracking the performance of their various campaigns. We believe this data, along with data provided by third parties, helps the firm analyze the return on investment of campaigns very quickly, which ad agency clients tend to demand more as they launch more below-the-line campaigns. Further, access to this data may help IPG adjust and improve campaigns, whether on the creativity or media-buying side, to increase ROI for clients and further enhance the value of its brand.

Narrow

Economic Moat

Interpublic Group of Companies

Interpublic Group of Cos., Inc. engages in the provision of advertising and marketing services. The firm specializes in consumer advertising, digital marketing, communications planning and media buying, public relations and specialized communications disciplines. It operates through the following segments: Integrated Agency Network (IAN), IPG DXTRA, and Corporate and Other. The IAN segment includes advertising and media services, as well as an array of global communications and marketing services. The IPG DXTRA segment offers events and public relations services as well as sports and entertainment marketing, corporate and brand identity and strategic marketing consulting. The Corporate and Other segment is composed of selling, general and administrative expenses including corporate office expenses as well as shared service center and other centrally managed expenses. The company was founded on September 18, 1930 and is headquartered in New York, NY.

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Interpublic Group of Cos., Inc. engages in the provision of marketing, communications, and business transformation services. It operates through the following segments: Media, Data, and Engagement Solutions, Integrated Advertising and Creativity Led Solutions, and Specialized Communications and Experiential Solutions. The Media, Data, and Engagement Solutions segment provides global media and communications services, digital services and products, advertising and marketing technology, e-commerce services, data management and analytics, strategic consulting, and digital brand experience. The Integrated Advertising and Creativity Led Solutions segment offers advertising, corporate and brand identity services, and strategic consulting. The Specialized Communications and Experiential Solutions segment includes global public relations and other specialized communications services, events, sports and entertainment marketing, and strategic consulting. The company was founded on September 18, 1930 and is headquartered in New York, NY.

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The Interpublic Group of Companies, Inc. (IPG) Q3 2023 Earnings Call Transcript

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Shares of Interpublic Group of Companies Inc. IPG, -1.69% sank 5.4% toward a one-year low in premarket trading Friday, after the marketing services company missed third-quarter profit expectations, citing continued weakness among technology and telecommunications customers. Net income fell to $243.7 million, or 63 cents a share, from $251.8 million, or 64 cents a share, in the year-ago period.

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New York, NY, Oct. 20, 2023 (GLOBE NEWSWIRE) -- Total revenue, including billable expenses, was $2.68 billion Revenue before billable expenses ("net revenue") was $2.31 billion, an increase of 0.6%, with organic decrease of 0.4% Reported net income was $245.7 million Adjusted EBITA before restructuring charges was $397.2 million Margin of adjusted EBITA before restructuring charges was 17.2% on revenue before billable expenses Diluted earnings per share was $0.63 as reported and $0.70 as adjusted Philippe Krakowsky, CEO of IPG: “During the third quarter, revenue performance did not measure up to expectations, yet we continued to demonstrate disciplined management of the business and to see positive contributions to growth from our media offerings, the health care sector, sports and experiential marketing, and public relations. “Factors that we have identified since the early part of the year continued to weigh on our growth in the quarter.

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News for Interpublic Group of Companies Stock (IPG)