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I was saying the right things about the Ad Agencies 12 months before Wall Street!

I was saying the right things about the Ad Agencies 12 months before Wall Street!

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Ad Industry Holding Company Report Premium Version Ad Industry Holding Company Report Premium Version Document Transcript

  • Rich Tullo Trading Desk Analyst rtullo@albertfried.com (212) 422 – 7282 September 22, 2009 ** Note: Specific company reports MARKET COMMENTARY REPORT are available for IPG, MDCA and OMC.Madison Avenue Is Set To Benefit From An Economic Recovery, In Our View; We Expect Multiple Expan-sion As Industry Top-Line Growth Beats Consensus Forecasts And Credit Concerns Subside Report Synopsis: This Advertising Holding Company Industry Report is a comprehensive source of global analysis of advertising business trends , investment analytics and market color. This report will also discuss strategic trends influencing capital structure, M&A activity and business strategy. Introduction: While the halcyon days of Advertising provide salacious plotlines for AMC’s Emmy award winning TV Show Mad Men; today advertising in- Above: The tip of the spear is now IPTV, Mobile and Cable as advertisers follow consumers dustry conglomerates are at the vanguard of new technologies and onto the new media. Source: AMC’s Inside media. Thus, Ad Agency Holding Companies can provide interesting Mad Men Blog site investment opportunities in our view. Industry Investment Thesis: We think Advertising Industry Holding Companies are positioned to benefit from a multi-year cyclical recovery in advertising and from secu- lar outsourcing and technology trends. Key Points: • As Agency holding companies reduce head count as well as real-estate footprints; we forecast margin improvements will lift earnings and share valuations. • Ad agencies benefited from the growth in Internet Advertising during the last cycle and we expect agencies to benefit from IPTV, Smart Phones and Interactive Media in the next cycle. • As the recovery progresses, we expect multiples will expand as institutional investors are attracted top-line growth, double digit margins, strong cash flow and the industry’s recurring revenue model. • We see upside to Wall Street’s bleak advertising industry estimates in an U.S. economic recovery. • We also expect Ad Agency Holding Companies to benefit from globalization as emerging markets are a driver of Media and Advertising industry growth. • As the demand for business services increases agencies ,in our view, will benefit from opportunities to provide outsourc- ing solutions. We expect Agency clients will turn to Holding Companies for web development, direct marketing, public relations and strategic consulting services. • Potential industry consolidation also provides upside for some holding company shares. As credit concerns sub-side, we predict M&A activity will increase. See important notes, disclosures and disclaimers on page 37-38 before making investment decisions.
  • Industry Overview • Broadcast media and advertising is roughly an $800 million U.S. industry according to data supplied by U.S. Bureau of Economic Analysis. Globally, its a $1.3 billion global industry according to the World Bank. Broadcast Media derives roughly 25% of its revenue from advertising and the balance (75%) is derived from ticket sales, subscription fees and the sales of publications, video games, theatrical entertain- ments and music. • Modern advertising industry holding companies provide a portfolio of services for their clients such as : Creative Services - Incorporates the production of traditional media, print and interactive advertising elements as well as consultation on label- ing and brand strategy, Media Buying - Encompasses the acquisition of advertising time as well as the development of a media buying plan which maximizes consumer impressions generated from media purchases, Public Relations - Is a mix of ser- vices which includes the coaching of executives for media engagements, writing of press releases, investor relations, community relations and crisis management, Customer Relationship Management - CRM is comprised of client facing services such as call centers, direct marketing, database management and web services designed to improve customer experience and to cross sell clients using the adver- tisers pre-existing data bases. • The six publically traded ad agencies are WPP (OTC: WPPGY, NC), Publicis (OTC: PUBGY, NC), HAVAS (OTC: HAVS, NC), Inter Public Group (NYSE: IPG, See Pg. 1**), Omnicom Group (NYSE: OMC, See Pg. 1**) and MDC Partners (NASDAQ: MDCA, See PG. 1**) and all six agencies are in the top ten by revenue of all agencies. In 2008, the six publicly traded agencies posted sales of roughly $44 billion; about 30%-40% of total advertising industry sales by our estimates. • Agencies are usually compensated via a contract and annual retainer fee. Typically, an agency’s client has the option to cancel the contract given 90 days notice. On occasion agencies will charge fees on a cost-plus basis or alternatively take a car- ried interest (% of sales) in the sales out come of a client. Media buying agencies work on a retainer for consulting services and charge a commission on media pur- chases made on the client’s behalf. • The sales process (for creative and media agencies) is competitive, protracted and influenced by long standing relationships as well as professional reputation. Exhibit I Top Ten Advertising Categories Travel & Tourism Automotive Personal Care Products 7% 15% 7% Restaurants Telecom 8% 12% Food & Candy 9% Financial Services 12% Miscellaneous Retail 1 9% Direct Response Local Services 10% 11% Source: TNS Market Intelligence
  • Industry Growth Opportunities • The Broadcast and Advertising Industries have historically grown at a 2% to 3% premium to GDP in the U.S. and E.U. However, growth outside the industrialized nations growth is substantially higher at 7% to 15% according to data supplied by the media buying agency Group M. • Emerging market growth rates are roughly double EU and the U.S rates. Emerging market growth has been fueled by growth in Brazil, Russia, India and China (BRIC countries) , as well as the Middle East and Africa. The growth catalysts in emerging markets are: the proliferation of TV sets in Eastern Europe and Asia and the deregu- lation of media in Africa and the Middle East. For example, South Africa now has roughly 30 TV channels on its major cable network up from just two prior to the deregulation of the late 1990’s. • In developed nations, the Ad industry has completed a major round of consolida- tion. Today, there are just six publically traded global agency holding companies as compared to several hundred in the 1980’s. We think bolt-on acquisition opportuni- ties are limited at this point in the cycle, but argue strategic deals make sense as synergy supported mergers could reduce the number of publically traded holding companies to four by the end of 2011. • We think the advertising industry will benefit from an ongoing secular shift in con- sumer preferences. Since 1999, global consumers have switched from “Old” media such as newspapers and Broadcast Network TV to “New” media distributed on the Internet, 3G mobile networks and Broadband Cable Systems. In our view, the tran- sition to new media has and will continue to benefit ad agencies. Since 2005, ow- ing to the transition, total revenue growth at Advertising Industry Holding Compa- nies have out performed U.S. GDP by roughly 600 basis points annually, see Exhibit II. • We expect traditional media (Newspapers and, Radio and Local TV) will remain chal- lenged as reduced audience results in the departure of traditional local advertisers to the “New Media”. Thus, we see more work for Agencies as media spend on TV (roughly $47 billion in 2008), Newspapers ($34 billion), Radio ($17 billion) and Business Directories ($14 billion) migrates from low margin traditional media onto the Internet, 3G mobile Networks and Broadband cable networks where margins are better. See Exhibit III on next page. Exhibit II U.S. GDP Growth vs. Ad Agencies 14.00% 12.00% 10.00% U.S. Gross Domestic Product 8.00% 6.00% Six Publically Traded Ad Agencies 4.00% 2.00% 0.00% 2005 2006 2007 2008 Source: U.S. Bureau of Economic Analysis and Albert fried and Company LLC. Estimates
  • Industry Growth Opportunities Source: IAB and Pricewaterhouse Coopers
  • The Financial Crisis, Media and Advertising Industry Holding Companies • As advertising is a discretionary expenditure for many enterprises, organic revenue at Holding Companies has declined in a range of 8% to 17% in 2008 owing to the recession. We expect industry revenue growth to trail the economy in a cyclical re- covery. However, as the global economy recovers, we expect agencies to benefit from growth in new markets as well as a recovery in U.S. and E.U. ad spending. • We also think the dramatic decline in Ad rates has created the potential for a stronger than expected Advertising recovery. We think the 2008 collapse in ad rates ( of 5% to 29%) will encourage increased demand. As prices decline we foresee, the largest advertisers will spend more to increase market share versus weak com- petitors. We also think small local advertisers will also increase ad spending as lower rates enable entrepreneurs to expand their client base. • We also think “consumer de-leveraging” may benefit the Advertising holding compa- nies in the long run. During the boom times of the last cycle, consumers did not need encouragement to spend borrowed money to buy goods and services. We argue that in the next recovery, Advertising will be more critical to enterprises as consumers will not spend money haphazardly. As the recovery progresses Advertis- ers, in our view, will need to educate consumers about the “need for” and “benefits of” the products they are marketing. We think the afore mentioned scenario in- creases the demand for Creative, Media and Customer Care services thus benefits the Ad Agencies. • As the economy recovers we expect agency operating margins to expand as market- ers increase spending on Internet and Cable. According to our discussions with industry managers, operating margins on a typical Internet media campaign are roughly 15% to 20% as compared to 5% to 10% for a traditional campaign. Thus we expect industry operating margins to expand once the ad market recovers. Quarterly Advertising By Media Distribution 2008 vs. 2007
  • The Financial Crisis, Media and Advertising Industry Holding Companies • As depicted in Exhibit I on page 2, the Auto Industry is the largest advertising indus- try followed by Telecom and Financial services. Domestic automotive advertising declined roughly 40% in lockstep with industry sales as GM and Chrysler filed for bankruptcy. As ad budgets are linked to revenue, Auto advertising and Financial Service Ad budgets were slashed as the credit crisis unfolded. • As the crisis ebbs, Automakers are now in the process of re-evaluating marketing plans; as a result the Chrysler, Volkswagen accounts are under review. Moreover, GM and F are also re-evaluating marketing strategies although their accounts are not necessarily under review. As the dust settles, Auto ad spending will rebound, in our opinion. Despite a jump in production to 12 million vehicles annually from 9 million, owing to the U.S. Governments cash for clunkers program, global auto manufacturing is still at all time lows. We expect Auto advertising to rebound as U.S. makers are set to introduce more than 40 new vehicles. Increased demand and new products should benefit creative advertising as well as media buying as incre- mental demand should lift prices. • In order to reduce marketing costs major advertisers such as Proctor and Gamble and Unilever are exploring ways to aggregate their accounts at fewer agencies. As a result, acquisition opportunities for the large holding companies are vaporous but over the long term the lack of acquisition growth could be offset by better margins and market share gains. The chart below: The secular decline in Automotive Newspaper Advertising accelerates as the credit crisis unfolds and the U.S. Ad- vertising market collapsed in 2007-2009. Auto Newspaper Advertising $6,000,000 $5,000,000 Dollar Value Ad Sales $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year Source: Newspaper Association of America and Albert Fried and Company LLC. Estimates
  • Investment Implications • We think top-line growth for advertising industry holding companies will out-pace U.S. GDP in the next business cycle. Advertising industry holding companies are currently trading at a discount to the S&P 500 market multiple. Based on our forecast for improved 2010 advertising prospects , we expect multiples to expand and see significant upside in Holding com- pany shares. In our view, the potential for the Advertising Industry Holding companies to significantly out-perform the market is high despite tepid comments by most industry CEO’s. • We think the Advertiser’s ability to bargain with agencies for lower rates on highly specialized mobile to IPTV marking campaigns will be limited . As today’s iterations of “New Media” campaigns prove effective (i.e. sell cars or drive store traffic) we expect Holding companies will be able to main- tain pricing power and margins. • We favor investing in individual Advertising Agency Holding Company shares as there are few ETFs, mutual and closed end funds with signifi- cant exposure to the group. The Power Shares Dynamic Media Portfolio (NYSE: PBS) lists OMC as a 2.67% holding. Interpublic Group is a holding in the Gabelli Small Cap Growth Fund (Open End) according to the Bloomberg professional service. The Gabelli Small Cap Growth Fund is up roughly 11.75% over the last ten years versus the Russell 2000 Index which is up 7.5% during the comparable time period according to com- pany reports. • Based on current valuation levels and data points, we think the whole group will out perform the S&P 500 over the next 12 to 18 months. Please ask for Albert Fried Trading Desk Reports for specific BUY/SELL recom- mendations Key Financial Metrics Recent PX∆ EPS Forward 52 WK 52 WK EBITDA LT Debt ROETicker Rating Price 3 MNTH 2010E PE High Low TTM Total Cap EV/EBITDA TTM OMC BUY $38.07 17.0% $2.72 14.0 $44.40 $20.90 1736.2 44.7 8.0 26.7 IPG BUY $7.47 29.1% NP NP $8.88 $2.57 860.2 38.9 5.1 NM WPPGY NC $43.66 27.5% $2.16 20.2 $48.52 $22.35 1767.6 42.7 10.2 11.6 PUBGY NC $40.59 31.4% $2.98 13.6 $39.76 $18.50 1300.1 34.0 6.7 19.7 MDCA BUY $6.60 14.3% NP NP $7.64 $2.19 54.7 54.3 6.8 NM HAVSF NC $3.00 19.5% $0.30 10.0 $3.05 $1.60 279.2 47.7 6.3 10.4Prices as of 9/15/09 Source: Bloomberg Professional service, Company and Albert Fried LLC and Company Reports
  • Investment Recommendations (Trading Desk Clients Special Report) • Interpublic Group of Companies Inc. (NYSE: IPG, BUY): Our favorite name in the group is Interpublic Group (as there is roughly 60% upside to our $11 target. IPG’s also controls McCann World Group; a creative advertis- ing market leader. We expect IPG’s quarterly comparisons will improve in 2010. In 2007 to 2009, IPG’s lost market share at its Microsoft account and revenue growth was also hampered by the recession. As IPG’s quar- terly comparisons improve; we predict continued margin improvement could provide upside to our estimates. Lastly, owing to the company’s business restructuring we suspect IPG has tremendous operating leverage and predict just 2%-3% upside to the top-line will create substantial up- side to our 2010 EPS estimate of $0.50. Moreover, IPG’s largest account ,GM, is expected to launch 25 vehicles in 2010 and increased advertising spending could provide upside to our estimates. • MDC Partners Inc. (NASDAQ: MDCA, BUY): We also like MDC partners as there is roughly 42% upside to our $9 Target. MDCA’s prospects to pitch for new accounts such as Chrysler and growth in existing clients such as Microsoft, Best Buy and Gap Stores could provide upside to our estimates. We expect MDCA to remain profitable in 2009 and forecast earnings growth to return in 2010 as MDCA’s clients benefit from an improved economy. We think MDCA is a takeover candidate as its Crispin Porter and Bogusky agency is a strategic fit with IPG, PUBGY and Dentsu (Japan). We suspect Dentsu is in the hunt for an acquisition as industry insiders have told they were on of the two final bidders for RazorFish which was sold to PUBGY. In an acquisition we see as much as 50% upside to our MDCA Price Target. • Omnicom Group Inc.: (NASDAQ: OMC, BUY) We think OMC shares are very attractive on a valuation basis as OMC is trading at roughly 14x our 2009 $2.70 EPS estimate. We argue OMC deserves a 18x premium multi- ple to the market and should be valued at $48 or which implies 30% up- side to the current share price. • Publicis Group S.A. (OTC: PUBGY, NC): While we do not cover, Publicis Group (OTC: PUBGY, NC)., PUBGY controls several leading agencies such as Saatchi and Saatchi, Digitas and Razorfish which it bought from Micro- soft in 3Q:09 for $600 million. Excluding the impact for the Razorfish deal PUBGY trades at roughly 13x 2009 EPS and its debt-to-cap ratio at 34% is below the industry average. • WPP Group PLC. (OTC: WPPGY, NC): While we do not cover WPP Group it is the largest holding company by revenue and owns Olgilvy, Group M and TNS market intelligence. Management has made negative comments regarding growth prospects but we think its acquisition of TNS Market Intelligence has shaded management prospective. • HAVAS Group S.A. (OTC: HAVSF, NC) Also not covered, 170 year old HAVAS is the second largest agency in France. HAVSF’s most known agency is Arnold in the U.S. HAVSF EV/EBITDA multiple is reasonable but its debt ratio is above the peer group average.
  • Rich Tullo Trading Desk Analyst rtullo@albertfried.com (212) 422 – 7282 September 22, 2009INTERPUBLIC (NYSE: IPG) TARGET $11 BUY PRICE $7.40Initiate Coverage of IPG with a BUY RATING and $11 CLOSETARGET MCAP $3.56BB THESIS SHARES 486.1M OUT. IPG is the Advertising Agency most levered to a cyclical recovery in the U.S and we like IPG’s exposure to foreign markets in particular India. We think IPG shares are undervalued at just 14x our 2010 EPS esti- 52 WEEK $8.55 mate of $0.50 and expect IPG’s multiple to expand to 20x or more as the recovery unfolds. HIGH 52 WEEK $2.57 LOW KEY POINTS: AVG. VOL. 6.7mm 10DY SHORT 27.8mm INT. SHS. • IPG is a leading global ad agency and while out of favor (owing to GM’s decline and the lost of some of the Microsoft account to MDCA) we like IPG as upside from new pitches is under the radar screen. • We expect IPG to maintain the bulk of the GM account and see upside in automotive as GM rolls out P/BV 1.9x 25 models in 2010/11. EV/ • As the recovery unfolds we expect EPS to remain positive in 2009 at $0.20 despite a significant 5.6x decline in revenue (13%) owing to the great recession. EBITDA • We expect EPS to recover in 2010 as IPG benefits from a recovery in industry ad rates, and in- P/E 14x creased U.S. economic activity. We forecast 2010 EPS will increase two fold to $0.50 from $0.20 in 2010 2009. WALL STREET CONCENSUS • IPG derives roughly 42% of its revenue from international sales. Thus the declining dollar and growth in China and India (where IPG benefits from its Unilever account) provides upside to our estimates. REVENUE (IN MILLIONS) • IPG is a takeover target in our view as IPG shares trade at a discount to peers on an EV/EBITDA mul- tiple basis. IPG also offers attractive synergies with its larger peers, notably WPPGY. 2007 $6,554.0 2008 $6,962.7 RISKS TO THESIS: 2009E $6,065.1 • Advertising is a cyclical business and a return of the recession could significantly reduce IPG earn- EPS ings potential. 2008A $0.52 • Advertising agencies have complicated accounting and unexpected accounting concerns could un- dermine shareholder value. 1Q:09A ($0.16) • The loss of critical employees could have negative implications on IPG’s client portfolio. 2Q:09A $0.04 Price Target: 3Q:09E $0.01 As the U.S. economic recovery unfolds, we think IPG’s top-line will grow faster than U.S GDP growth. IPG 4Q:09E $0.30 benefits from International markets, new technologies and increased demand to advertising, media and CRM services. Thus we argue IPG deserves a premium multiple to the S&P 500. To derive our $11 target 2009E $0.20 we apply a 20x multiple to our $0.50 2010 EPS estimate and with roughly 50% upside to our target, we initiate coverage of IPG with a BUY rating. 2010E $0.50 See important notes, disclosures and disclaimers on page 33-36 before making investment decisions.
  • Company Description • The Interpublic Group of Companies, Inc. is an advertising and marketing services company. The Companys agency brands create marketing solu- tions on behalf of clients worldwide. Its companies cover a range of mar- keting disciplines and specialties, from consumer advertising and direct marketing to mobile and search engine marketing. Its solutions vary from project-based activity involving one agency and its client to long-term, fully-integrated campaigns created by a group of its companies working together on behalf of a client. Interpublic operates in two segments: Inte- grated Agency Network, which consists of McCann Worldgroup, Draftfcb, Lowe Worldwide, Mediabrands and its domestic integrated agencies, and Constituency Management Group, which consists of the bulk of its special- ist marketing service offerings. In July 2008, the Company increased its stake in the Middle East Communication Networks from a minority posi- tion to 51% ownership. IPG Clients • IPG derives roughly 26% of its revenue from its top ten accounts. IPG’s largest account (GM by our model) accounted for 5.5 %of the company’s top line. IPG other notable accounts are Microsoft, Johnson and Johnson, Unilever, Verizon and Hyundai. • IPG is currently pitching to expand its franchise with Hyundai and Unilever and just won the account for Microsoft’s Pink mobile operating system as well as the Applebees account.Corporate Governance • IPG’s corporate governance is GOOD in our opinion and a marked im- provement over the situation that existed in the 2001 to 2004 era when the viability of IPG was in question. • Unfortunately, IPG has a combined Chairman and CEO which is not ideal. We note, Michael Roth has a solid reputation with investors and we expect at some juncture Mr. Roth will relinquish his CEO responsibilities as part of the company’s succession plan. • IPG has other beneficial corporate governance mechanisms. IPG to our knowledge does, not have a poison pill and IPG common shareholders have the right to call a special meeting with a 25% vote.
  • Recent Results • In 2008, IPG’s top-line grew 6.2% to $6.9 billion as compared to $6.5 billion in 2007. However, IPG’s revenue growth rate slowed to 6.2% in 2008 versus 9.3% in 2007 as the U.S. economy slowed. Despite eco- nomic challenges, the Company’s gross margins expanded to 37.6% in 2008 (from 28.3% in 2007) owing to cost cutting programs. As IPG posted modest revenue growth and maintained strong gross margins EPS grew 100% (to $0.52 per share in 2008 from $0.26 in 2007). • As Ad Agency results lag the economy, 1H:09 results for IPG declined dra- matically owing to the credit crisis and the following collapse of the U.S. Auto industry. The collapse in U.S. advertising, IPG’s revenue in 1H:09 declined 16% (to $2.8 billion from $3.3 billion in 1H:08). So as revenue declined, IPG posted a 1H:09 loss per share of $0.11 versus EPS of $0.03 in 1H:08. • IPG’s top-line declined roughly 20% in 2Q:09 to $1.4 billion (from $1.8 billion in 2Q:08). IPG’s revenue improved 11% in 2Q:09 versus the year ago period. Despite challenging economic conditions in 2Q:09, IPG’s EPS expanded sequentially to $0.04 as compared to a $0.15 loss per share in 1Q:09. Balance Sheet and Cash Flow • In addition to its ongoing overhead restructuring: IPG is also de-leveraging its business model. As a result, IPG’s long-term debt has declined to $5.7 billion in 2Q:09 from $6.8 billion on December 31, 2008. IPG’s near term maturities are not a risk (in our view) because the company is in a position to pay down its near-term maturities with cash on its balance sheet ($1.7 billion in the period ending June 30, 2009). • Like many media companies, IPG generates strong cash flow owing to high non-cash costs. In 2008, IPG generated Free-cash-Flow (FCF) of $1.40 per share which implies a Yield-to-FCF of 20%. In 2009, we expect FCF to advance to $2.37 (from $1.40 in 2008) owing to improvements in working capital. Earnings Forecast • We think IPG will face tough comparables in 3Q:09 as the Company bene- fitted from the Internet as well as International growth in 2008. We expect IPG’s 3Q:09 revenue to decline 17% (to $1.4 billion from $1.7 billion in 3Q:08). • We expect IPG’s gross margins to reach 33% and forecast the Company to earn $0.01 per share in 3Q:09 . As the U.S economy emerges from reces- sion, we expect IPG’s rate of revenue decline to moderate by 4Q:09. Therefore, we expect IPG to earn $0.20 in 2009 despite severe chal- lenges faced by IPG and the U.S. economy. • We expect IPG’s customers increase budgets in a recovering U.S. econ- omy and predict top-line growth to return in 2010 . Therefore, we forecast 3% revenue growth, gross margin expansion to 36% (from 33%) and pre- dict IPG’s EPS will nearly double to $0.50 in 2010.
  • THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIESINCOME STATEMENT SUMMARY Mar June Sept Dec Mar June Sept Dec Mar June Sept Dec 2004AFigures in millions. Figures in parentheses are losses. 2005A 2006A 2007A 1Q:08 2Q:08 3Q:08 4Q:08 2008A 1Q:09A 2Q:09A 3Q:09E 4Q:09E 2009E 1Q:10E 2Q:10E 3Q:10E 4Q:10E 2010ESales/Revenue 6387.0 6,274.3 6,190.8 6,554 1,485.2 1,835.7 1,740.0 1,901.8 6,962.7 1,325.3 1,474.4 1,439.7 1,825.7 6,065.1 1,312 1,504 1,512 1,954 6,281Salaries and related expenses 3,733.0 3,999.1 3,944.1 4,139 1,064.8 1,103.2 1,093.5 1,081.1 4,342.6 997 968 965 1159 4088.8 843.6 962.5 959.9 1,230.7 3,996.8S, G & A Expense 2,250.4 2,288.1 2,079.0 2,045 475.0 527.8 526.3 484.2 2,013.3 410.90 409.10 417.51 443.65 1681.16 380 421 423 567 1791Total operating expenses 6,522.1 6392.1 6084.8 6,209.9 1,543.0 1,635.1 1,623.7 1,574.1 6,387.9 1,407.2 1,377.5 1382 1603 5770.0 1224.1 1383.6 1383.2 1797.2 5,788.2Operating Income (135.1) (117.8) 106 344 (57.8) 200.6 116.3 327.7 574.8 (81.9) 96.9 57.6 222.7 295.1 87.9 120.3 128.5 156.3 493.0 Interest Expense (172.0) -181.9 (218.7) (236.7) (57.7) (53.0) (53.2) (48.0) -211.9 (34.8) (45.1) (50.0) (50.0) (179.9) (50.0) (50.0) (50.0) (50.0) (200.0) Interest Income 50.8 80 113.3 119.6 28.7 23.0 23.3 15.6 90.6 12.3 8.1 10.0 10.0 40.4 10.0 10.0 10.0 10.0 40.0 Other (10.7) 33.1 (5.6) 8.5 (1.4) 6.3 (1.0) 2.1 18 4.9 (23.3) 5.0 5.0 -8.4 4.0 4.0 4.0 4.0 16.0Pretax Income (267.0) (186.6) (5.0) 235.7 (88.2) 176.9 85.4 297.4 471.5 (99.5) 36.6 22.6 187.7 147.2 51.9 84.3 92.5 120.3 349.0Income Taxes 262.2 81.9 18.7 58.9 (23.7) 79.1 35.5 65.7 156.6 -25.4 4 7 32 17 11 19 20 32 82.2Income from consolidated ops (529.2) (268.50) (23.7) 176.80 (64.50) 97.80 49.90 231.70 314.90 (74.10) 32.90 15.81 155.82 130.23 40.49 65.76 72.14 88.41 266.80 Equity in net (loss) income of unconsolidated affiliates 5.8 13.3 12 7.5 1.1 0.5 (4.7) 1.0 3.1 0.5 (1.5) (1.5) (1.5) (4.0) 1.0 1.0 1.0 1.0 4.0Net Income Before Non-Controlling Interests (523.4) (255.20) (11.7) 184.30 (63.40) 98.30 45.20 232.70 318.00 (73.60) 31.40 14.31 154.32 126.43 41.49 66.76 73.14 89.41 270.8 Non- Controlling Interests and Disc. Ops (21.5) (16.7) (20.0) (16.7) 0.60 (3.2) 0.5 (15.7) (23.0) 6.6 (3.6) (3.0) 3.0 3.0 2.0 2.0 2.0 2.0 8.0Net Income (Loss) (544.9) (271.9) (31.7) 167.6 (62.8) 95.1 45.7 217 295 -67 27.8 11 157 129 43 69 75 91 279 Preferred Dividends (19.8) (26.3) (47.6) (27.6) (6.9) (6.9) (6.90) (6.9) (27.6) (6.9) (6.9) (6.9) (6.9) (27.6) (6.9) (6.9) (6.9) (6.9) (27.6) Allocation to Participating securities (8.7) (0.10) (1.6) (2.2)Income Avail. to Common (558.2) (289.2) (79.3) 131.3 (69.7) 88.1 38.7 208.5 265.2 (73.9) 20.9 4.4 150.4 101.8 36.6 61.9 68.2 84.5 251.2EarningsBasic $ (1.36) $ (0.68) $ (0.19) $ 0.29 $ (0.15) $ 0.19 $ 0.08 $ 0.45 $ 0.57 $ (0.16) $ 0.04 $ 0.01 $ 0.32 $ 0.22 $ 0.08 $ 0.13 $ 0.15 $ 0.18 $ 0.54Dilluted $ (1.34) $ (0.68) $ (0.19) $ 0.26 $ (0.14) $ 0.17 $ 0.07 $ 0.39 $ 0.52 $ (0.15) $ 0.04 $ 0.01 $ 0.30 $ 0.20 $ 0.07 $ 0.12 $ 0.13 $ 0.17 $ 0.50SharesDilluted 558.2 424.8 428.1 503.1 515.0 516.0 519.4 545.4 518.3 503.1 507.5 507.5 507.5 506.4 507.2 507.2 507.1 507.0 507.1EBITDA -135.1 -117.8 279.6 521.5 -14.7 243.8 160.5 501.0 748.1 -40.1 139.6 104.3 267.4 471.0 137.5 166.6 167.2 195.0 666.3EBITDA (TTM) -135.1 -117.8 279.6 521.5 586.7 640.6 705.7 748.1 748.1 865.2 761.0 704.8 471.0 471.0 648.8 675.9 738.7 666.3 666.3Revenue (TTM) 6,387.0 6,274.3 6,190.8 6,554.2 6,680.3 6,863.3 7,043.4 6,962.7 6,962.7 6,802.8 6,441.5 6,141.2 6,065.1 6,065.1 6,051.9 6,081.4 6,153.3 6,281.1 6,281.1Gross margin 2,654 2,275 2,247 2,415 420 733 647 821 2,620 329 506 475 666 1,976 468 541 552 723 2,284Gross margin (TTM) 2,654 2,275 2,247 2,415 2,465 2,555 2,676 2,620 2,620 2,529 2,302 2,131 1,976 1,976 2,116 2,151 2,228 2,284 2,284Net Income (TTM) (558.2) (289.2) (79.3) 131.30 185.8 152.4 188.4 265.6 265.2 261.4 194.2 159.9 101.8 101.8 212.3 253.3 317.1 251.2 251.2Margin %Gross Margin 41.6% 36.3% 36.3% 36.8% 28.3% 39.9% 37.2% 43.2% 37.6% 24.8% 34.3% 33.0% 36.5% 32.6% 35.7% 36.0% 36.5% 37.0% 36.4%Operating Margin -2.1% -1.9% 1.7% 5.3% -3.9% 10.9% 6.7% 17.2% 8.3% -6.2% 6.6% 4.0% 12.2% 4.9% 6.7% 8.0% 8.5% 8.0% 7.8%EBITDA Margin -2.1% -1.9% 4.5% 8.0% -1.0% 13.3% 9.2% 26.3% 55.5% -3.0% 9.5% 7.2% 14.6% 7.8% 10.5% 11.1% 11.1% 10.0% 10.6%EBITDA Contribution Margin - -15% -190% 67% -87% 15% -68% 26% 55% -28% -70% 162% -61% 31% -139% 14% 806% -16% 90%Net Margin -8.7% -4.6% -1.3% 2.0% -4.7% 15.4% 2.2% 11.0% 3.8% -5.6% 1.4% 0.3% 8.2% 1.7% 2.8% 4.1% 4.5% 4.3% 4.0%Annual Change %Revenue 0.0% -1.8% -1.3% 5.9% 9.3% 11.1% 11.5% -4.1% 6.2% -10.8% -19.7% -17.3% -4.0% -12.9% -1.0% 2.0% 5.0% 7.0% 3.6%Gross Margin NA -14.3% -1.3% 6.1% 66.4% -0.7% 27.4% 8.5% 8.5% 2.6% -9.9% -20.4% -24.6% -24.6% -16.3% -6.5% 4.6% 15.6% 15.6%EBITDA NA -12.8% NM NM NM -15.7% 68.2% 58.5% 43.5% NM -42.7% -35.0% -46.6% 1.0% NM 19.4% 60.2% -27.1% 41.5%Net Income NA NA NA NM NM NM NM NM 76.0% 6.7% -70.8% -75.2% -27.5% -56.1% NM NM NM -41.9% 115.4%EPS NA NA NA NM -39.2% -30.2% NM 24.9% 97.6% 8.5% -75.9% -88.3% -24.1% -61.0% -149.1% 196.2% NM -43.8% 146.3%Source: Albert Fried and Company LLC and Company Reports
  • Balance Sheet SummaryFigures in millions. Figures in parentheses are losses. 2006 2007 Mar June Sept 2008A Mar A June A 2009E 2010ECash and cash equivalents 1955.7 2014.9 1491.2 1831.0 1689.8 2,107.2 1,642.0 1,760.5 2,628.9 1,895.8Marketable securities 1.4 22.5 21.1 25.0 17.8 167.7 16.5 10.9 10.9 10.9Accounts receivable, net of allowance of $63.8 and $63.9 3934.9 4132.7 3752.7 3899.3 3821.2 3,746.5 3,159.1 3,205.4 3109.0 3086.1Expenditures billable to clients 1021.4 1210.6 1320 1325.6 1411.3 1,099.5 1,072.5 1,021.9 970.4 1,005.0Other current assets 295.4 305.1 357.5 343.2 301.5 366.7 379.2 355.7 276.2 360.0Total current assets 7,208.8 7,685.8 6,942.5 7,424.1 7,241.6 7,487.6 6,269.3 6,354.4 6,995.4 6,357.8Furniture, equipment and leasehold improvements, net of 624.0 620.0 616.8 598.6 571.8 561.5 529.5 521.8 500.06 427.72accumulated depreciation of $1,109.5 and $1,055.8 Deferred income taxes 476.5 479.9 535.0 491.8 474.6 416.8 453.1 447.3 447.3 479.5 Goodwill 3,067.8 3,231.6 3,265.4 3,272.6 3,325.0 3,220.9 3,243.0 3,298.0 3,338.0 3,398.0 Other assets 487.0 440.8 424.1 419.9 484.3 438.4 434.8 443.6 443.6 381.0Total assets 11,864.1 12,458.1 11,783.8 12,207.0 12,097.3 12,125.2 10,929.7 11,065.1 11,724.3 11,044.0Accounts payable 4,124.1 4,124.3 3,978.9 4,138.4 3,979.3 4,022.6 3,350.7 3,380.4 4,082 3,212Accrued liabilities 2,426.7 2,691.2 2,356.1 2,550.6 2,623.6 2,521.6 2,111.2 2,204.8 2,205 2,365Short-term debt 82.9 305.1 103.3 91.8 81.9 332.8 327.2 137.3 250 36Total current liabilities 6,633.7 7,120.6 6,438.3 6,780.8 6,684.8 6,877.0 5,789.1 5,722.5 6,536.5 5,613.2Long-term debt 2,248.6 2,044.1 2,050.3 2,045.8 2,043.1 1,786.9 1,781.9 1,901.1 1,651.1 1,615.1Deferred compensation and employee benefits 606.3 553.5 555.7 545.8 521.9 549.8 536.7 551.3 600.0 600.0Other non-current liabilities 434.9 407.7 412.1 412.0 436.4 378.9 395.0 367.4 367.4 400.0Total Liabilities 9,923.5 10,125.9 9,456.4 9,784.4 9,686.2 9,592.6 8,502.7 8,542.3 9,155.0 8,228.3   Total IPG stockholders’ equity 1,940.6 2,332.2 2,327.4 2,422.6 2,411.1 2,206.3 2,117.4 2,225.6 2,272.1 2,516.6Noncontrolling interests 37.9 30.7 34.4 34.4 37.8Total Equity 1,940.6 2,332.2 2,327.4 2,422.6 2,411.1 2,244.2 2,148.1 2,260.0 2,306.5 2,554.5Total Liabilities and Equity 11,864.1 12,458.1 11,783.8 12,207.0 12,097.3 12,125.2 10,650.8 11,065.1 11,724.4 11,044.1Book value per share 1,940.6 2,332.2 2,327.4 2,422.6 2,411.1 2,494.7 2,396.3 2,488.4 2,534.9 2,777.9Cash Per Share 4.6 3.9 2.9 3.5 3.3 3.9 3.3 3.5 5.2 3.7Current ratio 1.09 1.08 1.08 1.09 1.08 1.09 1.08 1.11 1.07 1.13Acid test ratio 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 1.0Long Term Debt to Capital 19.0% 16.4% 17.4% 16.8% 16.9% 14.7% 16.7% 17.2% 14.1% 14.6%Debt Ratio 19.7% 18.9% 18.3% 17.5% 17.6% 17.5% 19.3% 18.4% 16.2% 15.0%EBITDA-to-interest coverage ratio 1.28 2.20 2.77 3.02 3.33 3.53 4.81 3.92 2.62 3.33Days sales outstanding 232 225 215 203 200 207 185 201 190 180Accounts payable days 349 366 380 387 393 389 433 415 400 400Net operating profits 87 213 -34 122 81 262 -57 93 263.2 410.8Return on invested capital (ROIC) 0.7% 1.7% -0.3% 1.0% 0.7% 2.2% -0.5% 0.8% 2.2% 3.7%ROAE - 8.3% -5.3% NM 3.6% 11.6% NM 0.9% 4.5% 10.3%ROAA - 1.5% -1.0% NM 0.7% 2.2% NM 0.2% 0.9% 2.2%Source: Albert Fried and Company LLC and Company Reports
  • Statement of Cash FlowFigures in millions. Figures in parentheses are losses.Year Ended: 2006A 2007A 1Q:08 2Q:08 3Q:08 2008A 1Q:09A 2Q:09A 2009E 2010ECASH FLOWS FROM OPERATING ACTIVITIES:   Net (loss) income (36.7) 167.6 (62.8) 97.7 43.10 295.0 (73.6) 31.4 101.8 251.2Adjustments to reconcile net (loss) income to net cash (used in) provided by operatingactivities:Depreciation and amortization of fixed assets and intangible assets 173.6 177.2 43.1 43.2 44.20 173.3 41.8 42.7 170.8 173.3Provision for (reversal of) bad debt 1.2 (3.6) (1.3) 0.9 6.70 17.0 3.9 4.7 38.6 60.0Amortization of restricted stock and other non-cash compensation 55.1 79.7 19.8 23.2 21.40 80.1 9.3 15.5 62.0 60.0Amortization of bond discounts and deferred financing costs 31.8 30.8 7.0 6.7 7.40 28.7 13.8 30.0 30.0Loss on early extinguishment of debt    12.5 —   7.6 17.0 24.6 12.0Deferred income tax benefit (57.9) (22.4) (53.5) 47.9 9.50 74.9 (48.2) 21.1 -27.1 (50.0)Other 90.6 41.9 0.7 6.0 7.50 29.0 (7.3) 14.1Changes in assets and liabilities, net of acquisitions and dispositions, providing (using) cash:   Accounts receivable 235.4 43.5 499.1 (151.8) 118.1 283.9 520.9 81.4 712.2 22.9Expenditures billable to clients (87.7) (124.5) (88.3) (12.5) (104.4) 69.7 17.2 62.0 129.1 34.6Prepaid expenses and other current assets (6.9) 9.7 (31.7) 2.1 15.5 (19.2) (22.0) 14.8Accounts payable (370.0) (221.5) (256.0) 157.5 (226.7) 6.8 (612.5) (97.5) 59.1 (869.3)Accrued liabilities (21.4) 121.8 (363.7) 187.7 95.9 (147.7) (388.6) 51.1Other non-current assets and liabilities 1.9 (14.6) (0.4) (8.7) (4.0) (26.2) (5.8) (38.2)   Net cash (used in) provided by operating activities 9.0 298.1 (288.0) 399.9 34.2 865.3 (557.3) 233.9 1,301.2 (275.5)   CASH FLOWS FROM INVESTING ACTIVITIES:   Acquisitions, including deferred payments, net of cash acquired (15.1) (151.4) (17.1) (9.2) (74.7) (106.0) (13.6) (18.6) (70.0) (100.0)Capital expenditures (127.8) (147.6) (31.9) (26.9) (24.0) (138.4) (11.7) (16.0) (100.0) (120.0)Net sales and maturities (purchases) of short-term marketable securities 112.7 (18.1) 1.6 (4.7) (0.5) (162.0) 150.7 6.7Other investing activities 41.8 49.3 0.4 3.1 (14.40) 2.1 0.4 (1.2)   Net cash provided by (used in) investing activities 11.6 (267.8) (47.0) (37.7) (113.6) (404.3) 125.8 (29.1) (170.0) (220.0)   CASH FLOWS FROM FINANCING ACTIVITIES:   Repayment of 4.5% convertible Senior Notes 5.8 (190.8) - - (190.8) (190.8)Proceeds from issuance of 10.0% Senior Notes due 2017    —      587.7 587.7Purchase of long-term debt 30.9 (3.5) (34.7) (698.3) (870.0) (250.0)Issuance costs (79.8) (0.8) 0.80 -11.3 (15.8) (27.1)Net increase (decrease) in short-term bank borrowings (5.3) (13.1) (4.9) 13.8 13.8Distributions to noncontrolling interests (24.4) (18.1) (3.0) (4.9) (2.4) (14.60) (6.5) (10.9) (32.0)Preferred stock dividends (47.0) (27.6) (6.9) (6.9) (6.9) (27.60) (6.9) (6.9) (27.6) (27.6)Other financing activities (9.4) 6.1 (1.1) (6.2) (10.7) 3.20 (2.5) (3.7) (11.2)   Net cash used in financing activities (129.7) (37.3) (207.1) (31.9) (24.1) (275.8) (15.9) (134.1) (557.2) (277.6)   Effect of exchange rate changes on cash and cash equivalents (11.1) 66.2 18.4 9.5 (37.7) (92.9) (17.8) 47.8 40 40Net decrease in cash and cash equivalents (120.2) 59.2 (523.7) 339.8 (141.2) 92.3 (465.2) 118.5 614.0 (733.1)Cash and cash equivalents at beginning of year 2,075.9 1,955.7 2,014.9 1,491.2 1,831.0 2014.9 2,107.2 1,642.0 2,014.9 2,628.9   Cash and cash equivalents at end of period 1,955.7 2,014.9 1,491.2 1,831.0 1,689.8 2,107.2 1,642.0 1,760.5 2,628.9 1,895.8   Cash per share 4.57 4.00 2.90 3.55 3.25 4.07 3.26 3.47 5.19 3.74Operating cash flow per share 0.02 0.59 (0.56) 0.78 0.07 1.67 (1.11) 0.46 2.57 (0.54)Free cash flow per share (FCF) (0.28) 0.30 (0.62) 0.72 0.02 1.40 (1.13) 0.43 2.37 (0.78)Free cash flow per share (less acquisitions) (0.31) (0.00) (0.65) 0.71 (0.12) 1.20 (1.16) 0.39 2.23 (0.98)Simple cash flow per share 0.15 0.55 (0.06) 0.27 0.16 0.79 (0.07) 0.15 0.46 0.72Yield to FCF -4.0% 4.3% -8.9% 10.3% 0.3% 20.0% -16.2% 6.1% 33.9% -11.1%Simple cash yield 2.1% 7.9% -0.9% 3.8% 2.3% 11.3% -1.0% 2.1% 6.6% 10.3%Shares outstanding 428.1 503.1 515.0 516.0 519.4 518.3 503.1 507.5 506.4 507.1Source:Albert Fried and Company LLC and Company Reports
  • Rich Tullo Trading Desk Analyst rtullo@albertfried.com (212) 422 – 7282 September 22, 2009OMNICOM GROUP INC. (NYSE: OMC) TARGET $48 BUYInitiate Coverage of OMC with a BUY RATING and PRICE $37.90$48 TARGET MCAP 11.7BB THESIS SHARES 310.8 OUT. Trading at just 14x our 2010 $2.72 EPS estimate, we think OMC shares are undervalued. OMC is the largest U.S. advertising agency whose BBDO, DDB and TWBAWorldwide are among the most awarded 52 WEEK agencies in the industry. The demise of Chrysler and rumblings at Proctor and Gamble are a concern but $42.32 HIGH we think investors have discounted these potential account losses. We expect OMC to lose the Chrysler account which is currently under review but argue that OMC will replace the Chrysler account with higher 52 WEEK $20.09 margin accounts as the U.S. economic recovery unfolds. LOW AVG. VOL. KEY POINTS: 2.2mm 10DY • OMC, in our opinion, has one of the best management teams in any industry and OMC shares are an SHORT INT. 6.06mm SHS. exceptional value at just 14x our 2010 EPS estimate. • OMC is positioned to benefit from WPP’s missteps as its acquisition of TNS Market Intelligence has burdened WPP’s balance sheet. Thus we expect OMC will increase market share at existing accounts P/BV 2.9 and acquire agencies on better terms where the Company competes head to head with WPG. EV/ • OMC is positioned for long-term growth in our view as OMC has an attractive sales mix; 43% of reve- NM nue is derived from higher margin advertising and 36% of revenue is derived from CRM. EBITDA • As OMC restructures its balance sheet, the risk of near term maturities diminishes in our view. P/E 2010 13.9x • By our model, we forecast OMC’s EPS will grow in excess of 10% from 2009-2010 however, if adver- tising recovers faster than we expect, we see significant upside to our estimates. WALL STREET CONCENSUS RISKS TO THESIS: REVENUE (IN MILLIONS) 2007 12,694 • Advertising in the US could decline faster than we expect. 2008 13,360 • A loss of critical employees and or accounts could significantly impact OMC’s prospects. • Increased competition from OMC competitors could reduce OMC’s advertising market share. 2009E 12,005 • Advertising agencies have complicated accounting and unexpected accounting concerns could un- EPS dermine shareholder value. 2008A $3.17 PRICE TARGET: 1Q:09A $0.53 As the U.S. economy recovers, we think there is upside to our OMC earnings estimates. We also think investors have discounted the loss of the Chrysler account which may, in our view, benefit OMC in the 2Q:09A $0.75 long term. We suspect OMC made deep concessions in 2008 to 2009 to retain Chrysler and we predict the loss of Chrysler will not weigh on OMC’s top or bottom line in 2009. In 2010, we think OMC will be 3Q:09E $0.56 able to offset Chrysler with stable higher margin accounts which could provide upside to our estimates. To value OMC, we use a 18x market multiple which we think is reasonable given the apparent U.S eco- 4Q:09E $0.76 nomic recovery. Thus, we derive a $48 Price Target for OMC shares and with roughly 30% upside to our target, we initiate coverage of OMC with a BUY rating. 2009E $2.48 2010E $2.72 See important notes, disclosures and disclaimers on page 33-36 before making investment decisions.
  • Company Description • Omnicom Group Inc. (Omnicom) is primarily a holding company. Omnicom, through its subsidiaries, provides professional services, such as advertis- ing, marketing and corporate communications. It provides professional services to clients through multiple agencies operating in all major mar- kets around the world. The Companys agencies provide a range of ser- vices, which it groups into four fundamental disciplines: traditional media advertising, customer relationship management (CRM), public relations and specialty communications. OMC Clients • OMC controls roughly 1500 advertising agencies, thus following the de- mise of Chrysler, no one client makes up more than 2.8% of revenue. • We suspect Proctor and Gamble (2.8% of revenue) is OMC’s largest client and Chrysler’s 2.6% in 2008 is less than 1.5% of revenue. • OMC’s top 100 accounts collectively represented about 50% of the Com- pany’s revenue in 2008 according to company reports. Corporate Governance • OMC has very good corporate governance (in our view) and perhaps the best corporate governance in the global media industry. • Similar to IPG, OMC has a well respected management and we think the separation of powers between Chairman and CEO is a benefit to OMC shareholders. • OMC has nine independent directors which are elected annually. • Management owns roughly 5% of OMC shares. • In our view, OMC ratio of audit to consulting fees of 9.5:1 indicates OMC financial managers are efficient.
  • Recent Results • In 2008, OMC’s top-line grew 5.2% to $13.4 billion versus $12.7 billion in 2007. OMC’s revenue growth rate slowed to 5.2% in 2008 versus 11.6% in 2007 as the U.S. economy slowed. Despite the U.S. economic slow- down, modest revenue growth and robust EBITDA margins (14%) resulting in 7% EPS growth (to $3.17 per share in 2008 from $2.95 in 2007). • OMC’s business cycle lags the global economy, thus OMC’s 1H:09 results declined dramatically owing to the credit crisis and the resulting collapse of the U.S. Auto industry. OMC’s 1H:09 top-line declined 19% (to $5.6 billion from $6.6 billion in 1H:08). Owing to revenue declines, OMC’s 1H:09 EPS declined to $1.62 versus $1.28 in 1H:08. • OMC’s top-line declined roughly 17% in 2Q:09 to $2.8 billion (from $3.4 billion in 2Q:08). As revenue declined, EBITDA margins at OMC also de- clined to 14.6% from 17% in the year ago period. Thus in 2Q:09, OMC reported a 11% EPS decline to $0.75 per share versus $0.96 in 2Q:08. Balance Sheet and Cash Flow • Following a period of growth through acquisitions, OMC is now de- leveraging its business model. As a result, OMC’s long-term debt has de- clined to $2.4 billion in 2Q:09 from $3.05 billion on December 31, 2008. OMC’s near term maturities are not a risk in our view. OMC has re- structured its long-term debt and now the bulk of its maturities are beyond 2014. • As a rule, media companies generate strong cash flow owing to high non- cash costs and OMC is no exception to the rule. In 2008, OMC generated Free-cash-Flow (FCF) of $3.84 per share which implies a Yield-to-FCF of 10%. In 2009, we expect FCF to expand to $5.15 expand (or 13.5% on a yield basis) owing to improvements in working capital and lower capital expenditures.Earnings Forecast • We think OMC will face tough comparables in 3Q:09 as the Company benefitted from a better Ad market in 2008. We expect OMC’s 3Q:09 reve- nue to decline 6% (to $3.1 billion from $3.3 billion in 3Q:08). • We predict OMC will maintain 11% EBITDA margins and forecast the Com- pany to earn $0.56 per share in 3Q:09 . As the U.S economy emerges from recession, we expect OMC’s rate of revenue decline to moderate to 3% by 4Q:09. Therefore, we expect OMC to remain profitable and to earn $2.48 in 2009 despite severe challenges faced by the ad industry and the U.S. economy. • We expect top-line growth to return in 2010 as OMC’s client mix shifts to higher margin clients in a recovering U.S. economy. Therefore, we forecast 5% OMC’s top-line growth in 2010, EBITDA margins to expand to 13.5% (from 12.3%) and predict EPS to grow 10% to $2.72 from $2.48 in 2009.
  • Omnicom Group (Millions USD) Mar June Sept Dec Mar June Sept DecINCOME STATEMENT SUMMARY 2006A 2007A 1Q:08 2Q:08 3Q:08 4Q:08 2008A 1Q:09A 2Q:09E 3Q:09E 4Q:09E 2009E 2010ESales/Revenue 11,377 12,694 3,195 3,477 3,316 3,371 13,360 2,747 2,871 3,117 3,270 12,005 12,544 Cost of Goods Sold 8,088 9,008 2,327 2,416 2,406 2,411 9,560 2,014 2012 2275 2338 8639.4 8866 S, G & A Expense 1,806 2,027 518 544 537 512 2,110 450 449 511 517 1927 2018Oper. Income before Depr 1,634 1,823 396 563 420 494 1,872 325 409.7 330.4 415.3 1438.4 1659.6 Depreciation & Amort. 150 164 45 46 47 45 183 43 40 40 37 160 153Oper. Income after Depr 1,484 1,659 351 517 373 448 1,689 282 369.7 290.4 378.3 1278.4 1506.6 Interest Expense 125 107 25 31 35 33 125 27 21.9 30 30 108.9 140 Non-Operating Inc (Exp) 33 33 14 13 14 9 50 5 5 5 5 20 20Pretax Income 1,392 1,585 340 498 353 425 1,615 261 352.8 265.4 353.3 1189.5 1386.6 Income Taxes 467 537 115 167 118 142 543 89 102 74 99 354 471 Minority Interest -91 -111 -24 -35 -28 -28 -114 -14 -20 -20 -20 -74 -80Income before Extra Items 864 976 209 307 214 271 1,000 165 230 171 234 761 835Net Income 864 976 209 307 214 271 1,000 165 230 171 234 761 835 Preferred DividendsIncome Avail. to Common 864 976 209 307 214 271 1,000 165 230 171 234 761 835Common Dividends Per Share 0.5 0.58 0.15 0.15 0.15 0.15 0.60 0.15 0.15 0.15 0.15 0.6 0.64EarningsBasic $ 2.52 $ 2.99 $ 0.66 $ 0.96 $ 0.69 $ 0.88 $ 3.20 $ 0.53 $ 0.75 $ 0.56 $ 0.76 $ 2.48 $ 2.72Dilluted $ 2.50 $ 2.95 $ 0.65 $ 0.96 $ 0.69 $ 0.88 $ 3.17 $ 0.53 $ 0.75 $ 0.56 $ 0.76 $ 2.48 $ 2.72SharesBasic 342.9 326.4 318.6 317.5 309.1 307.5 312.5 307.5 307.5 307.5 307.5 307.5 307.5Dilluted 345.6 330.8 320.9 320.8 310.7 307.6 315.5 307.6 307.6 307.6 307.6 307.6 307.6ENTERPRISE VALUEEBITDA 1,700 1,889 424 588 449 512 1,973 336 420 340 425 1,478 1,700EBITDA (TTM) 1,700 1,889 1,771 1,901 1,997 1,973 1,973 1,885 1,717 1,608 1,478 1,478 1,700EV/EBITDARevenue (TTM) 11377 12694 13138 13399 13614 13359 13359 12911 12305 12106 12005 12005 12544Gross margin 3,289 3,686 868 1,061 910 960 3,800 733 859 842 932 3,365 3,678Gross margin (TTM) 3,289 FALSE 3,855 3,871 3,928 3,800 3,800 3,664 3,462 3,393 3,365 3,365 3,678Net Income (TTM) 864 976 1002.1 1032.1 1043.9 1001 1,000 957.0 880.5 837.6 800.9 761.3 835.2Margin %Gross Margin 28.9% 29.0% 27.2% 30.5% 27.4% 28.5% 28.4% 26.7% 29.9% 27.0% 28.5% 28.0% 29.3%EBITDA Margin 14.9% 14.9% 13.3% 16.9% 13.5% 15.2% 14.8% 12.2% 14.6% 10.9% 13.0% 12.3% 13.5%EBITDA Contribution Margin 1.42 0.96 2.90 3.49 3.92 0.63 0.85 1.48 1.64 4.03 5.65 2.47 3.33Net Margin 7.6% 7.7% 6.5% 8.8% 6.5% 8.0% 7.5% 6.0% 8.0% 5.5% 7.2% 6.3% 6.7%Annual Change %Revenue 8.5% 11.6% 12.5% 8.1% 6.9% -7.0% 5.2% -14.0% -17.4% -6.0% -3.0% -10.1% 4.5%Gross Margin 12.1% 12.1% 10.0% 1.5% 6.7% -11.8% 3.1% -15.6% -19.1% -7.5% -2.9% -11.4% 9.3%EBITDA 12.1% 11.1% 36.2% 28.3% 27.2% -4.5% 4.4% -20.8% -28.6% -24.2% -16.9% -25.1% 15.0%Net Income 14.7% 13.0% 14.2% 10.8% 5.8% -13.7% 2.5% -21.1% -24.9% -20.1% -13.5% -23.9% 9.7%EPS 14.7% 18.0% 18.2% 14.3% 11.3% -9.3% 7.5% -0.6% -11.0% -17.0% -18.3% -21.9% 9.7%Source: Albert Fried LLC. and Company Estimates and Company Reports
  • Omnicom GroupBALANCE SHEET SUMMARY 2006 2007 Mar June Sept 2008A Mar A June A 2009E 2010E 2011E 2012E Cash & ST-Investments 1,929 1,841 863 959 553 1,112 427 400 1,565 490 2,161 1,570 Inventories 801 891 672 637 12 630 630 630 630 Receivables 5,994 6,830 6,410 6,517 5,906 5,776 4,883 4,999 5100 6367 5105 6000 Current Assets 9,646 10,504 9,468 9,534 8,351 8,565 6,940 6,900 7,295 7,487 7,896 8,200 Property Plant & Eq. 640 707 725 733 720 720 690 704.8 682 687 707 707 Intangibles, Goodwill 6,995 7,514 7,678 7,829 7,617 7,441 7,340 7,330 7,340 7,340 7,340 7,340 Fixed Assets 8,159 8,768 8,969 9,150 8,988 8,754 8,621 8,986 8022 8027 8047 8047Total Assets 17,805 19,272 18,437 18,684 17,339 17,318 15,561 15,885 15,317 15,514 15,943 16,247 Current Debt 12 15 23 26 180 19 46 2.1 Accounts Payable 7,333 8,081 7,120 7,404 6,643 6,881 5,636 5,894 5,636 5,636 5,636 5,636 Current Liabilities 10,296 11,227 10,343 10,345 9,650 9,754 8,292 8,329 5636 5636 5636 5636 Total Long Term Debt 3,055 3,055 3,055 3,055 3,054 3,054 2,718 2,414 1,879 1,879 1,879 1,879 Long Term Liabilities 3,637 3,953 4,058 4,076 4,028 4,041 3,938 1,284 4,746 4,076 4,104 4,104Total Liabilities 13,933 15,180 14,401 14,422 13,678 13,796 12,229 12,026 12,261 11,591 11,619 11,619 Retained Earnings 4,290 5,078 5,238 5,497 5,664 5,888 5,981 6,164 5,930 6,574 7,273 8,283 Total Common Equity 3,871 4,092 4,037 4,262 3,661 3,523 3,331 2,351 3,088 3,924 4,431 5,441Stockholders Equity 3,871 4,092 4,037 4,262 3,661 3,523 3,331 3,860 3,088 3,924 4,431 5,441Revenue 11,377 12,694 - - - 13,360 - - 12,005 12,544 13,422 14,361COGS 8,088 9,008 - - - 9,560 - - 8,639 8,866 9,539 10,153Average Inventories - 801 - - - 736.5 - - 651 634 630 630Turns - 11.2 - - - 13.0 - - 13.27 13.99 15.14 16.12Inventory Days - 32.5 - - - 28.1 - - 27.5 26.1 24.1 22.6Average Payables - 7707 - - - 7478 - - 6,259 5,636 5,636 5,636Turns - 1.17 - - - 1.3 - - 1.38 1.57 1.69 1.80Payable Days - 312 - - - 285.5 - - 264 232 216 203Average Recievables - 6,412 - - - 6,303 - - 5643 5733.5 5736 5552.5Turns - 1.98 - - - 2.12 - - 2.13 2.19 2.34 2.59DSO - 184.37 - - - 172.2 - - 172 167 156 141Cash Cycle - 529 - - - 486 - - 463 425 396 366
  • Omnicom Group Inc. Statement of Cash Flows (OMC)In millions USDYear Ended: 2006A 2007A 1Q:08 2Q:08 3Q:08 2008A 1Q:09A 2Q:09A 2009E 2010ENet Income Attributable to Omnicom Group Inc. 864 976 209 307 214 1,000 178 254 761 835Depreciation 150 164 5 86 47 183 43 44 160 153Share Based Compensation Shs. (8) (2) 44 (2) 15 21Amort. Intang. Asset 40 44 87 53Amortization 91 111 12 13 14 114 13 14 74 80Earnings of Affil. (15) (10) 24 59 (15)Windfall tax benefit on employee stock p - - —Minority interest (27) (17) (1) (6) (6) (13) (3) (0.3) (13) (13)Change in other assets and liabilities, 11 21 (4) (6) (13) 27 (474) 952 676 -600Doubtful accounts - - 1 5 6 107 0Amort. Restrict. Shs 71 69 15 13 59 60 1 70 70Accounts Receivable (358) (509) 588 (94) 690Increase) decrease in work in progress - - 59Billable Production (55) 101 (109) (11) —Other Assets 97 137 (171) 106 —Prepaid Expenses (210) (125) (1,128) (853) —Accounts Payable 865 450 (11) 20 (778)Other Accrd. Liabs. 168 (29) 83 6 —Accrued Taxes 58 218 (62) (291) (436) —Advances Affiliates (90)Cash from Operating Activities 1,741 1,599 (508) 416 326 1,394 (228) 338 1,729 525Capital Expenditures (178) (223) (42) (51) (59) (212) (23) (40) (145) (150)Purch. Equity Secs. (236) (359) (388) (441)Purch. of LT Investment (89) (121) 210 — (3) (61)Other net 4 10 (14) (51) 5Purchase of AFS Inv. (350) (42) (13)Sales of AFS Inv. 530 183 (8) (2) (2) 38 (1) (6)Proceeds from collection of notes receiv 14 - -Proceeds from divesture of businesses 31 - 31 -Cash from Investing Activities (189) (441) (135) (168) (217) (680) (23) (99) (145) (150)Line of Credit, Net (4) (1) (49) (48) (48) 5 (47) 247Issuance of Debt 997 3 (316) (92) (438) 2 (2) 26Repayment of Debt (300) (2) 33 31 14 (2) 0 -839Excess tax benefit on stock based comp 27 17 115 13 51 25 25Dividends Paid (176) (183) 4 6 3 (192) - (94) -192 -192Purch. Treas. Stock (1,345) (900) (20) (59) 31 (847) (14) (10)Proceeds from employee stock plans 298 101 7 3 (11) 86 28 6 90 90Other (80) (77) - (2) (119) (842) (54)Cash from Financing Activities (584) (1,041) (341) (139) (355) (1,054) (371) (396) (916) (77)Foreign Exchange Effects (65) (64) 4 (7) (139) (356) (63) 145 (200) (220)Net Change in Cash 904 54 (979) 102 (385) (696) (685) (13) 468 78Net Cash - Beginning Balance 836 1,740 1,793 814 916 1,793 1,097 412 1,097 412Net Cash - Ending Balance 1,740 1,793 814 916 531 1,097 412 400 1,565 490Cash per share $5.03 $5.35 $2.54 $2.85 $1.71 $3.57 $1.34 $1.30 $5.09 $1.59Operating cash flow per share $5.04 $4.77 ($1.58) $1.30 $1.05 $4.53 ($0.74) $1.10 $5.62 $1.71Free cash flow per share (FCF) $4.52 $4.11 ($1.71) $1.14 $0.86 $3.84 ($0.82) $0.97 $5.15 $1.22Simple cash flow per share $2.74 $3.07 $0.58 $1.11 $0.93 $3.52 $0.84 $0.84 $2.75 $2.95Yield to FCF 11.9% 10.8% -4.5% 3.0% 2.3% 10.1% -2.2% 2.5% 13.5% 3.2%Simple cash yield 7.2% 8.1% 1.5% 2.9% 2.4% 9.3% 2.2% 2.2% 7.2% 7.8%Shares outstanding 345.6 335 320.9 320.8 310.7 307.6 307.6 307.6 307.6 307.6Figures in millions. Figures in parentheses are losses.Source: Albert Fried LLC. and Company Estimates and Company Reports
  • Rich Tullo Trading Desk Analyst rtullo@albertfried.com (212) 422 – 7282 September 9, 2009MDCA PARTNERS (NASDAQ: MDCA) TARGET: $9.00 BUYAs We Predicted MDCA’s Crispin Porter and Bogusky (CP+B) Has Been PRICE $6.35Invited To Pitch The Chrysler Account; Reiterate BUY and $9.00 Target MCAP $191.7mm KEY POINTS: SHARES 27.4mm OUT. • According to Ad Age and our conversations with industry insiders, Chrysler (now a division of Fiat SPA) 52 WEEK $7.99 is “quietly” putting its creative advertising business up for review. HIGH • Fiat in a “jump ball” selection process, may choose one or more of ten agencies including (BBDO 52 WEEK (OMC, NC) , Publicis (PUBGY, NC) , WPG (WPPGY, NC) and CP+B (MDCA, BUY) pitching the account. LOW $2.19 • We think MDCA has a 70% chance of winning the Chrysler account. AVG. VOL. • By our estimates and discussions with industry insiders, Chrysler’s ad spending was down 40% or 10DY 42,970 more in 2008/2009 owing to 40%+ sales declines and its bankruptcy filing. • Thus there is upside to Chrysler’s ad budget in a recovering economy. Fiat is set to introduce its Euro- SHORT INT. 18,652 SHS. pean models to North America via Chrysler dealers and Chrysler will launch Hybrid vehicles in 2011. • In addition to the potential Chrysler account; the Windows 7.0 rollout and the Gap Stores Holiday P/BV 0.63x advertising campaign should also drive top-line results. • Our BUY Rating is unchanged and our $9.00 Target continues to be derived by a applying a 6x EV/EBITDA EV/EBITDA multiple to our 2010 EBITDA estimate of $65 million (from $68 million) . 2010E 4.4x • MDCA remains one of the best opportunities in our universe and with roughly 45% upside to our tar- P/E get we reiterate our BUY rating. 21.5x 2010E INVESTMENT THESIS ESTIMATES REVENUE (IN MILLIONS) We expect MDCA to benefit from the new Microsoft Windows (NASDAQ: MSFT) 7.0 launch in 3Q:09: The MDCA’s CP+B is the agency of record for Microsoft’s Windows products. CP+B was hired by Microsoft to 2008A $584.6 rebuild its brand to counter Apple’s (NASD: AAPL) aggressive negative advertising. We think MSFT contrib- uted $15 million or about 2.5% to MSFT’s top line in 2008. We expect MSFT will increase ad spending in 2009E $574.5 the run-up to it’s its windows launch and offset weakness MDCA might incur owing to a recessionary econ- 2010E $607.8 omy. As CP+B is Best Buy’s creative Ad Agency we think the company will benefit from increasing competi- tion between Wal-Mart and Best Buy and the surge in new consumer electronics such as smart phones and LED TV’s. EPS 2008A $0.00 RISKS-TO-THESIS 1Q:09A $0.00 • MDCA, through its Accent CRM division, operates call centers for Sprint. Sprint had been losing mar- 2Q:09A $0.01 ket share and investors became concerned about MDCA’s CRM franchise. • Roughly 20% of MDCA’s revenue is special project related and vulnerable to cost cuts. 3Q:09E $0.00 • MDCA competes against large well funded International Ad agency holding companies and could lose market share if its competitors price MDCA out of the market. 4Q:09E $0.13 • The loss of a top-ten account could materially impact MDCA’s results. 2009E $0.14 2010E $0.29 See important notes, disclosures and disclaimers on page 33-36 before making investment decisions.
  • Events • “Chrysler has put out its feelers wide, reaching out to as many as 10 agencies rang- ing from Crispin Porter & Bogusky, WPPs Grey and Publicis Groupes Hal Riney as part of its fast-moving search for new fourth-quarter creative ideas, according to executives familiar with the situation.” ...Ad Age, September 4, 2009 • We think MDCA’s clients; Best Buy (BBY, NC) and Gap Stores (GPS, NC) will actively advertise in the 2009/10 holiday season. BBY is in a market share war with Wal- Mart (WMT, NC) and Amazon.com (AMZN, NC). Moreover, as Microsoft (also a MDCA client) roll’s out windows 7.0; MDCA will also benefit from increased advertising at BBY to support Geek Squad and Windows upgrade related sales opportunities. • GPS’s prospects are also showing signs of improvement; in-part owing to the work CP+B has completed for Old Navy (a division of Gap Stores). In August GPS, re- ported better than expected same store sales (declines). In particular, as most re- tailers experienced declines, same store sales at Old Navy improved 4%Investment Implications • We think there is a better than 70% probability that MDCA will win a portion of the Chrysler account. BBDO (a division of OMC, NC) is the legacy agency and we think the probability of BBDO will retain the account is low. Chrysler’s sales where down 15% in August despite the U.S. governments cash for clunkers program. In our view, MDCA’s other competitors are conflicted and may not be able to optimize budgets. WPG is Ford’s agency of record and we think its unlikely Ford will allow WPG (WPGGY, NC) to directly work with Chrysler. Publicis (PUBGY, NC) is Volks- wagen’s agency of record in Europe therefore the scope of work they can complete for Fiat SPA may also be limited. Thus we think, MDCA for technical and “political” reasons has a distinct advantage in winning some or all of Chrysler’s creative adver- tising account. • While Chrysler was not the account it once was, to avoid liquidation the FIAT needs to change Chrysler sales trends. Therefore, we think Chrysler’s 2010 budget could surpass the $300 million, in 2009, spent by MDCA’s legacy auto industry account, Volkswagen. If MDCA lands the entire Chrysler account (which is unlikely in our view) we expect the incremental EBITDA benefit to MDCA in 2010 will be in a range of $5 to $10 million. • We think MDCA is strategically positioned to benefit from increased advertising at BBY and GPS. Gap Stores’ holiday ad budget could run as high as $300 million according to industry reports. We also think MDCA benefits from the favorable fash- ion trends as Old Navy offers stylish fashions at “Great Recession” prices. As con- sumers look to save money we think teenagers have switched from high priced designer labels to Old Navy. We argue that GPS was strategically well positioned to benefit from consumers trading down but it is MDCA’s ad work that seems to have enabled GPS to execute on its strategy. As a result, we expect 2009 revenue will come in at the top end of the range ($574 million) and MDCA to remain profitable in 2009 by our model.
  • Table 1.MDC PARTNERS INCOME STATEMENT(All figures in $000s except where noted) 2007 A Mar. A Jun.A Sep. A Dec.A 2008 A Mar. A Jun. A Sep. E Dec. E 2009E Mar. E Jun. E Sep. E Dec. E 2010ERevenue $547,319 $143,344 $158,275 $126,738 $156,291 $584,648 $126,738 $134,882 $137,257 $175,671 $574,548 $139,412 $134,882 $157,846 $175,671 $607,811Operating Expenses Total Operating Expenses 524,304 143,528 150,200 124,624 145,952 564,304 124,624 126,015 130,883 161,793 543,315 134,320 129,910 145,802 157,624 567,657Operating Profit 23,015 (184) 8,075 2,114 10,339 20,344 2,114 8,867 6,374 13,878 31,233 5,091 4,972 12,044 18,047 40,154 Operating margin % 4.2% -0.1% 5.1% 1.7% 6.6% 3.5% 1.7% 6.6% 4.6% 7.9% 5.4% 3.7% 3.7% 7.6% 10.3% 6.6%Other Income (Expenses) Gain on sale of assets, settlement of long-term debt 3,065 (14) (14) Other income and foreign exchange gain, (loss) (7,192) 3,603 (527) 2,629 7,552 13,257 2,629 (2,541) (200) (200) (312) (200) (200) (200) (200) (800) Interest expense (13,672) (3,889) (3,413) (3,633) (4,064) (14,998) (3,761) (3,723) (3,761) (3,761) (15,006) (4,305) (4,305) (4,305) (4,305) (17,220) Interest income 1,726 206 173 203 1161 1743 203 70 203 203 679 300 300 300 300 1200 Total Other Income (Expenses) (16,073) (80) (3,767) (801) 4,635 (12) (929) (6,194) (3,758) (3,758) (14,639) (4,205) (4,205) (4,205) (4,205) (16,820)Income from continuing operations before taxes 6,942 (264) 4,308 1,313 14,974 20,332 1,185 2,673 2,616 10,120 16,594 887 767 7,839 13,842 23,334 b/f taxes, equity in affiliates and minority interestsIncome taxes 5,620 (825) 3,943 615 (1,336) 2,397 615 1,608 1,046 4,048 7,317 (355) (307) (3135) (5537) (9334) Tax rate 81.0% 22.0% 22.0% 28.0% 28% 11.8% 51.9% 60.2% 40.0% 40.0% 48.0% 40.0% 40.0% 40.0% 40.0% 40.0%Income from continuing operations 1,322 561 365 698 16,310 17,935 570 1,065 1,570 6,072 9,277 532 460 4,703 8,305 14,001 b/f equity in affiliates and minority interestsEquity in earnings of non-consolidated affiliates 165 140 81 93 100 349 93 105 100 100 398 100 100 100 100 400Income (loss) from continuing operations (19,078) (1,393) (2,504) 409 13,635 10,148 663 1,170 1,570 6,072 9,475 632 560 4,803 8,405 14,401 Net income margin % -3.5% -1.0% -1.6% 0.3% 8.7% 1.7% 0.5% 0.9% 1.1% 3.5% 1.6% 0.5% 0.4% 3.0% 4.8% 2.4%Income (loss) from discontinued operations (7,277) (252) (9,763) (10,015) (252) (108) (500) (500) (1360) (500) (500) (500) (500) ($2,000)Net income attributed to non-controlling interests (382) (983) (1093) (1686) (4144) (623) (613) (1179) (1659) (4074) % Income from Continuing opes -4% -8% -8% -8% -8% -8% -8% -8% -8% -8%Net Income (Loss) (26,355) (1,253) (2,504) 157 3,872 133 29 79 (23) 3,886 3,971 (491) (553) 3,124 6,246 8,326Net Income (loss) per share ($1.05) ($0.05) ($0.09) $0.01 $0.14 $0.00 $0.00 $0.01 ($0.00) $0.13 $0.14 ($0.02) ($0.02) $0.11 $0.21 $0.29Weighted Average Number of Common Shares Outstanding:Basic 25,001 26,800 26,800 27,116 26,800 26,800 26,800 24,800 24,800 24,800 24,800 24,800 24,800 24,800 24,800 24,800Diluted 25,001 26,800 26,800 27,116 27,116 26,958 27,116 27,116 29,116 29,116 28,116 29,116 29,116 29,116 29,116 29,116MDCA share of Ebitda 31,696 7,810 13,914 9,325 15,563 46,612 9,325 15,488 12,565 19,394 56,772 11,867 11,756 18,263 23,786 65,672MDC share of Ebitda (TTM) 31,696 33,908 41,770 43,694 46,612 46,612 48,127 49,701 52,941 56,772 56,772 59,313 55,582 61,280 65,672 65,672EV 352,556 362,073 337,477 339,979 317,677 273,411 290,516 235,340 236,497 218,348 212,491 141,897 163,442 206,532 278,943 278,679EV/EBITDA 11.1 10.7 8.1 7.8 5.9 5.9 6.0 4.7 4.5 3.7 3.7 2.4 2.9 3.4 4.2 4.2(Earnings before intrest,taxes, depreciation and amortization less minority intrest)EBITDA Margin 5.8% 5.4% 8.8% 7.4% 10.0% 8.0% 7.4% 11.5% 9.2% 11.0% 9.9% 8.5% 8.7% 11.6% 13.5% 10.8%Other per ShareEbitda Per Share (diluted) $2.09 $0.37 $0.63 $0.36 $0.68 $2.03 $0.36 $0.61 $0.47 $0.72 $2.17 $0.27 $0.26 $0.51 $0.71 $1.75MDC Share of Ebitda (basic) $1.27 $0.29 $0.52 $0.34 $0.58 $1.74 $0.35 $0.62 $0.51 $0.78 $2.29 $0.48 $0.47 $0.74 $0.96 $2.65MDCA Share of Ebitda (per share diluted) $1.27 $0.29 $0.52 $0.34 $0.57 $1.73 $0.34 $0.57 $0.43 $0.67 $2.02 $0.41 $0.40 $0.63 $0.82 $2.26Operating earings per share (Basic) $0.21 ($0.02) $0.15 $0.04 $0.52 $0.69 $0.04 $0.10 $0.10 $0.40 $0.64Operating earings per share (Diluted) $0.21 ($0.02) $0.15 $0.04 $0.51 $0.69 $0.04 $0.10 $0.08 $0.34 $0.57 0.02 0.02 0.26 0.47 0.76Cash earnings per share (basic) $1.81 $0.43 $0.55 $0.39 $1.17 $2.55 $0.38 $0.37 $0.39 $0.66 $2.05 0.31 0.31 0.59 0.84 2.42Cash earnings per share (diluted) $1.81 $0.43 $0.55 $0.39 $1.16 $2.53 $0.37 $0.34 $0.33 $0.56 $1.81 $0.25 $0.24 $0.47 $0.66 $1.92Percentage of SalesGross Margin % 35.7% 33.3% 34.3% 32.2% 36.0% 32.9% 32.2% 34.6% 32.8% 30.0% 32.2% 31.0% 31.0% 32.0% 31.8% 31.5%Ebit margin % NM NM -1.9% 2.5% 5.9% 2.2% 2.3% 1.6% 1.8% 1.9% 1.9% 0.6% 0.6% 5.0% 7.9% 3.8%Ebitda Margin % 9.5% 6.9% 10.6% 7.7% 11.7% 9.4% 7.7% 12.2% 10.0% 12.0% 10.6% 5.6% 5.7% 9.3% 11.8% 8.4%Net Income Margin % NM NM NM 0.3% 8.7% NM 0.5% 0.9% 1.1% 3.5% 1.6% 0.5% 0.4% 3.0% 4.8% 2.4%YOY Performance MeasuresGross Margin 11% 16% -4% -17% -13% -2% -14% -14% 10% 6% -4% 6% -10% 12% 6% 3%Operating profit 73% NM 56% NM NM NM NM 10% 202% 34% 54% 141% -44% 89% 30% 29%Ebitda NM 326% 46% -23% NM 5% -2% -2% 41% 15% 11% -20% -53% 8% -2% -16%Net Income 29% -84% -3% -106% -291% -153% -148% -147% 284% -55% NM -5% -52% 206% 38% 52%Source:Albert Fried andCompany LLC and Company Reports
  • Table 2.MDC PARTNERS BALANCE SHEET(All figures in $000s except where noted) 2006 Mar. Jun. Sep. 2007 Mar. A Jun. A Sep. A 2008 Mar. A Jun. A 2009E 2010EASSETS CURRENT ASSETS Cash and cash equivalents 6,591 4,786 9,359 7,089 10,410 5,749 18,510 17,483 41,331 46,247 57,934 89,836 38,722Total current assets 166,476 182,926 185,295 178,994 173,438 189,710 204,359 188,309 175,744 191,659 203,811 202,599 176,473 Fixed assets 44,425 44,536 42,594 46,428 47,440 47,591 48,018 45,451 44,021 40,798 38,406 42,921 45,418 Investment in affiliates 2,058 2,015 861 394 1,434 1,657 1,748 1,871 1,593 1,692 1,938 1,692 1,692 Goodwill 203,693 199,381 207,924 219,709 217,726 224,240 227,772 227,294 238,214 237,270 239,534 237,270 237,270Total Assets 493,501 504,393 517,896 517,088 520,698 539,690 552,671 528,715 529,239 536,085 544,280 550,172 526,543CURRENT LIABILITIESTotal current liabilities 271,515 287,436 214,179 185,837 195,802 201,885 228,636 201,120 187,835 186,956 233,040 192,612 182,223 Longterm debt 5,754 5658 62,162 79,258 115,662 115,927 115,856 115,063 133,305 132,872 132,767 131,872 131,872 Revolving credit facility 22,215 25,631 1,901 18,561 6,801 10,302 9,701 19,567 11,860 19,567 19,567 Convertible notes 38,613 38,975 42,238 45,235 45,395 43,838 44,131 42,285 36,946 35,677 38,424 (0) Other liabilities 5,512 5,488 6,239 7,068 8,267 8,624 8,779 8,878 6,949 8,914 9,259 9,909 25,149 Deferred tax 1,140 1136 1148 5282 819 530 552 596 4,700 4,589 4,596 5,284 5,284Total liabilities 322,534 338,693 348,181 348,311 367,846 389,365 404,755 378,244 379,436 388,575 391,522 397,667 364,095COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITYMinority interests 46,553 47,370 48,125 48,093 24,919 25,940 25,893 26,063 22,622 57,037 57,786 56,683 58,300Total shareholders equity 124,414 118,330 121,590 120,684 127,933 124,385 122,023 124,408 127,181 90,473 96,420 95,821 104,147Total liabilities and shareholders equity 493,501 504,393 517,896 517,088 520,698 539,690 552,671 528,715 529,239 536,085 544,280 550,172 526,543Book value per share $10.09 $10.60 $10.71 $10.37 $9.90 $9.87 $10.35 $9.48 $9.06 $9.42 $9.77 $9.59 # $8.45Cash Per Share $0.28 $0.20 $0.39 $0.29 $0.42 $0.21 $0.69 $0.64 $1.53 $1.71 $2.14 $3.20 # $1.33Shares 23,875 24,275 24,275 24,800 25,001 26,800 26,800 27,116 26,958 27,116 27,116 28,116 29,116Current ratio 0.61 0.64 0.87 0.96 0.89 0.94 0.89 0.94 0.94 1.03 0.87 1.05 # 0.97Acid test ratio 0.59 0.60 0.81 0.91 0.84 0.89 0.86 0.89 0.88 0.97 0.84 1.00 # 0.91Long Term Debt to Capital 22.6% 23.2% 43.9% 48.2% 52.8% 55.4% 54.3% 54.0% 55.5% 57.2% 49.9% 56.7% # 52.1%Total Debt 95,454 124,646 105,104 126,270 162,853 161,620 161,883 158,947 171,797 170,068 172,950 210,479 131,872Longterm Debt 44,367 44,633 126,615 150,124 162,958 178,326 166,788 167,650 179,952 188,116 144,627 189,863 151,439Leverage Ratio 0.8 3.5 2.3 2.7 3.3 3.2 2.9 2.7 2.3 2.1 2.1 1.8 # 1.3Debt Ratio 0.43 0.51 0.46 0.51 0.56 0.57 0.57 0.56 0.57 0.65 0.64 0.69 # 0.56EBITDA-to-interst coverage ratio 3.5 0.9 4.3 3.6 4.4 2.7 5.2 2.8 4.1 2.7 4.5 4.3 # 3.2Days sales outstanding 99.8 128.3 100.6 98.6 92.6 90.7 104.3 89.1 75.6 82.7 - 83.0 57.8Accounts payable days 107.4 109.5 65.7 74.2 55.1 60.7 73.0 61.5 73.0 73.0 60.8 47.3 # 44.6Return on invested capital (ROIC) 4.5% 2.6% 4.9% 3.4% 6.2% 4.7% 5.5% 5.7% 5.5% 6.6% 6.8% 8.6% # 12.1%ROAE NM NM NM NM NM NM NM NM NM NM NM 3.6% # 8.3%ROAA NM NM NM NM NM NM NM NM NM NM NM 0.7% # 1.5%Source:Albert Fried andCompany LLC and Company Reports
  • Table 3.MDC PARTNERS STATEMENT OF CASH FLOWS(All figures in $000s except where noted) 2007 Mar. A Jun. A Sep. A Dec 2008 Mar. A 2009E 2010E 2011ECASH FLOWS FROM OPERATING ACTIVITIESNet Income/loss (26,355) (3,394) (4,470) 3,250 4,747 133 411 9,475 14,401 25,926Income (loss) from non-controlling interests (7,277) 2,001 (5,841) 0 (6,175) (10,015) (382) (4,144) (4,074) (6,503)Net income (loss) attributable to MDC Partners Inc. (19,078) (1,393) 1,371 3,250 6,920 10,148 29 5,331 10,326 19,423Loss from discontinued operations (252) (1,360) (2,000) (2,000)Income (loss) attributable to MDC Partners Inc. from continuing 281 6,691 12,326 21,423Adjustments to reconcile net income (loss)Depreciation 14,638 6,046 2,288 4,270 4,155 16,759 4,017 17,317 15,176 13,416Amortization of intangibles 14,608 4,042 6,406 3,275 3,922 17,645 3,576 14,169 12,416 10,976Stock-based compensation 9,088 1,759 1,699 1,595 8,490 13,543 1,686 8,700 9,000 10,000Goodwill and intagible impairment charges 0 0Amortization and write-off of deferred finance charges 2,330 346 342 348 312 1,348 318 318 318 318Deferred income taxes 5,253 577 1,423 (2,960) (960) 490 (298) (300) (300)Gain (loss) on disposal of assets and long-term debt (1,691) 3 110 29 142Earnings of non consolidated affiliates (165) (140) (81) (69) (59) (349) (93) (584) (400) (400)Foreign exchange and other 7,278 (4,117) 1,055 (2,565) (8,940) (14,567) (1,999) (1,999) (1,999) (1,999)Minority interest and other 3,754 725 205 (49) (2,165) (1,284) 2,126 2,311 2,500 2,500Changes in non-cash working capital 0Accounts receivable (12,712) (10,681) (2,694) 11,809 27,882 26,316 (9,259) 22,634 (23,921) (11,364)Expenditures billable to clients 8,635 (9,592) 217 3,400 8,129 2,154 (1,431) (1,431) (1,068) (1,132)Prepaid expenses and other current assets (1,160) (851) 596 (221) 2,113 1,637 (256) (422) 0 0Accounts payable, accruals and other liabilities (25,083) (20,289) 30,084 (25,823) 4,283 (11,745) (5,138) (4,561) 6,372 3,087Advance billings (1,662) 23,420 (4,395) (1,375) (17,492) 158 6,610 -Cash flow from continuing operations 4,033 (10,725) 48,398 (622) 23,894 60,945 928 65,024 2,829 33,110Discontinued operations 99 275 (69) 93 (3,798) (3,499) (368) (2,000) (2,000) (3,000)Net cash provided by operating activities 4,132 (10,450) 33,605 (529) 34,820 57,446 560 63,024 829 30,110Cash flows from investing activitiesCapital expenditures (20,072) (4,223) (4,416) (2,083) (3,673) (14,395) (830) (5,000) (5,000) (5,000)Acquisitions, net of cash (47,648) (5,737) (4,295) (623) (25,186) (35,841) (3,352) (8,000) (7,000) (14,500)Proceeds from asset sales 8,270 136 93 210 (197) 242 2Other investments (1,464) (109) (5) 244 (215) (85)Distributions from non-consolidated affiliates 68 (260) 632 440 59 283Discontinued operations 0 (547) (547)Net cash used in investing activities (60,914) (9,933) (8,555) (2,512) (29,186) (50,186) (4,121) (17,657) (12,000) (19,500)Cash flow from financing activitiesIncrease (decrease) in bank indebtedness (4,910)Payments under old credit facility (45,000)Proceeds from new credit facility 1,901 16,660 (11,760) 3,501 (601) 7,800 9,866Proceeds from term loan 111,500 0 18,500 18,500Repayment of long-term debt (5,843) (200) (243) (1,169) (272) (1,884) (635) (1,000) (39,943) (20,000)Deferred financing costs (3,946) 0 0Issuance of share capital 4,893 0Proceeds from stock subscription receivable 3 (2) (1) 13 13Purchase of treasury shares (769) (874) (2) (20) (10) (906) (320) (320)Proceeds from note payable 3,250 0Discontinued operations (147) 0 0Net cash provided by financing activities 60,929 15,586 (12,002) 2,310 17,616 23,510 8,924 (1,307) (39,943) (20,000)Effect of exchange rate on cash (328) 136 (287) (296) 598 151 (447) (472) 0Net increase (decrease) in cash 3,819 (4,661) 12,761 (1,027) 23,848 30,921 4,916 43,588 (51,114) (9,390)Cash and cash equivalents, beginning of period 6,591 10,410 5,749 18,510 17,483 10,410 41,331 46,247 89,836 38,722 0Cash and cash equivalents, end of period 10,410 5,749 18,510 17,483 41,331 41,331 46,247 89,836 38,722 29,331Free cash flow (FCF) (15,940) (14,673) 29,189 (2,612) 31,147 43,051 (270) 58,024 (4,171) 25,110Cash per share $0.42 $0.21 $0.69 $0.64 $1.52 $1.53 $1.71 $3.20 $1.33 $1.01Operating cash flow per share $0.17 ($0.39) $1.25 ($0.02) $1.28 $2.13 $0.02 $2.24 $0.03 $1.03Free cash flow per share (FCF) ($0.64) ($0.55) $1.09 ($0.10) $1.15 $1.60 ($0.01) $2.06 ($0.14) $0.86Simple cash flow per share ($0.69) $0.09 ($0.01) $0.32 $0.34 $0.75 $0.26 $1.28 $1.27 $1.56Yield to FCF NM NM NM NM 27.3% 15.2% -0.1% 19.7% -1.4% 8.2%Simple cash yield NM 1.1% -0.1% 3.8% 4.0% 7.1% 2.5% 12.2% 12.1% 14.8%Source: Albert Fried and Company LLC and Company Reports
  • Rich Tullo Trading Desk Analyst rtullo@albertfried.com (212) 422 – 7282 September 22, 2009WPP GROUP PLC. (OTC: WPPGY) NO TARGET NOT RATEDDESCRIPTION: PRICE $44.13 CLOSEWPP plc (WPP) along with its subsidiaries and affiliates is engaged in communication services businesses. TheCompany operates in four segments: Advertising and Media Investment Management, Information, Insight andConsultancy, Public Relations and Public Affairs, and Branding and Identity, Healthcare and Specialist Communi-cations. During the year ended December 31, 2008, the Company’s consolidated revenues were derived fromAdvertising and Media Investment Management, with the remaining 55% of its revenues being derived from the MCAP 11.1bbremaining three segments. In February 2009, the Company acquired Red Dot Square Solutions. In October2008, the Company completed the acquisition of TNS Group (TNS). In August 2008, it announced that its whollyowned operating company acquired a 51% stake in Yunes SMA, S.A. In August 2008, it announced that its whollyowned operating company Bates141, acquired a majority stake in 10AM Communications (10AM). SHARES 251.1mm OUT. RECENT EVENTS 52 WEEK • September 16, 2009: WPPs Ties to Ford Force Grey From Chrysler Pitch HIGH $46.66 • September 15, 2009: Ogilvy Public Relations Worldwide (Ogilvy PR), an integrated global communi- cations firm, announced today that Liz Van Lenten has joined the agency as executive vice president and group director of its Chicago Consumer Marketing Practice. 52 WEEK $22.35 LOW • September 11, 2009: DALIAN, China – Despite signs that the global economy is starting to recover, WPP PLC Chief Executive Martin Sorrell says there is little to cheer about in the advertising industry. AVG. VOL. 85,000 • September 3, 2009: Moodys Investors Service on Thursday lowered its ratings on U.K.-based adver- 10DY tising agency WPP PLC (WPPGY) to the brink of junk territory, citing global advertising weakness and high debt levels from its acquisition of Taylor Nelson Sofres PLC. SHORT 218,00 INT. SHS. P/BV 1.3x EV/ 10x EBITDA P/E 20.4x FY: 2009 See important notes, disclosures and disclaimers on page 12, 13 before making investment decisions.
  • WPG GroupConsolidate Financial AnalysisIn Million USD as of 9/16/09 except per share and % figures FY 2004 FY 2005 FY 2006 FS1 2007 FS2 2007 FY 2007 FS1 2008 FS2 2008 FY 2008 FS1 2009 Original Original Original Original Original Original Original Original OriginalIncome StatementRevenue 35,898.5 48,475.8 10,869.1 5,753.7 6,635.5 12,376.2 6,592.8 7,086.0 13,702.3 6385.608Operating profit (loss) 978.9 1,267.6 1,425.7 629.3 983.5 1,607.4 802.6 770.1 1,569.1 349.3048Pretax Income 795.7 1,075.9 1,254.7 579.3 864.4 1,439.3 668.3 699.2 1,368.6 266.9665Income bef XO items 548.4 723.3 887.9 400.3 633.9 1,030.6 468.5 473.7 941.8 205.9201Net profit (loss) 500.1 661.3 801.8 358.3 577.2 932.1 411.1 395.4 804.7 161.4009Basic EPS Before Abnormal Items $0.44 $0.55 $0.67 $0.30 $0.55 $0.84 $0.41 $0.39 $0.79 0.1619FRS3 EPS $0.44 $0.55 $0.67 $0.30 $0.50 $0.79 $0.36 $0.35 $0.70 0.1325Diluted EPS $0.43 $0.54 $0.65 $0.29 $0.48 $0.76 $0.35 $0.34 $0.69 0.131Dividends per Share $0.14 $0.17 $0.21 $0.09 $0.19 $0.27 $0.10 $0.18 $0.28 0.0773EBITDA 1,168.3 1,535.5 1,767.7 799.7 1,183.0 1,976.9 1,007.9 1,022.5 2,029.8 649.4747Actual Sales Per Employee 621,209.7 683,373.1 136,973.5 NM NM 145,862.6 NM NM 101,498.7 NMReturn on Common Equity 8.1 10.5 11.3 11.9 11.9 11.9 12.3 9.0 9.0 7.2408Balance SheetTotal Current Assets 8,932.8 10,642.5 13,627.1 12,673.2 16,680.1 16,680.1 16,059.2 15,919.4 15,919.4 13044.03Total Long-Term Assets 11,545.1 14,088.0 15,131.3 15,753.9 17,525.5 17,525.5 18,601.2 19,735.9 19,735.9 20600.94Total Assets 20,477.8 24,730.5 28,758.4 28,427.2 34,205.5 34,205.5 34,660.4 35,655.3 35,655.3 33644.97Total Current Liabilities 9,898.3 12,619.9 15,819.6 14,543.3 19,638.3 19,638.3 17,884.7 17,688.7 17,688.7 14710.63Total Long-Term Liabilities 4,706.4 5,260.3 5,270.9 6,292.5 6,448.5 6,448.5 7,891.1 9,280.2 9,280.2 10344.35Total Liabilities 14,604.7 17,880.2 21,090.5 20,835.7 26,086.8 26,086.8 25,775.8 26,968.9 26,968.9 25054.98Total Shareholders Equity 5,873.1 6,850.4 7,667.9 7,591.5 8,118.8 8,118.8 8,884.5 8,686.4 8,686.4 8589.995Shares Outstanding 1,185.3 1,252.9 1,256.7 1,218.0 1,191.5 1,191.5 1,174.3 1,255.3 1,255.3 1255.4Book Value per Share $4.87 $5.36 $5.96 $6.08 $6.61 $6.61 $7.33 $6.69 $6.69 $6.62Tangible Book Value per Share -$3.48 -$4.16 -$4.24 -$4.83 -$5.41 -$5.41 -$5.55 -$6.53 -$6.53 -$6.99Equity Ratio(%) 28.7 27.7 26.7 26.7 23.7 23.7 25.6 24.4 24.4 25.5313Cash FlowsOperating profit (loss) 500.1 661.3 801.8 358.3 577.2 932.1 411.1 395.4 804.7 161.4009Cash From Operating Activities 1,019.2 1,522.0 1,216.8 (14.2) 1,826.1 1,783.2 (326.6) 1,863.4 1,691.0 -284.9827Cash From Investing Activities (540.7) (1,221.8) (694.9) (538.9) (1,145.6) (1,675.2) (480.4) (1,738.0) (2,305.8) -327.5663Cash From Financing Activities (94.2) (1,551.3) 80.8 (193.6) 304.2 102.8 (45.0) 1,051.6 1,083.6 -281.1114Net Changes in Cash 384.3 (1,251.1) 602.7 (746.7) 984.7 210.9 (852.0) 1,177.0 468.8 -893.6604Free Cash Flow 854.9 1,230.4 908.1 (144.4) 1,653.3 1,480.9 (460.4) 1,642.5 1,330.3 -453.2326Free Cash Flow per Basic Share $0.75 $1.03 $0.76 -$0.12 $1.42 1.26 -$0.40 $1.44 $1.16 -$0.37Free Cash Flow per Diluted Share $0.70 $1.00 $0.73 $0.79 $1.23 1.21 $0.95 $1.15 $1.14 $0.92Cashflow per Share $0.90 $1.27 $1.01 -$0.01 $1.57 1.52 -$0.29 $1.63 $1.48 -$0.23Source: The Bloomberg Professional Service
  • WPG GroupROE AnalysisIn Million USD as of 9/16/09 except per share and % figures FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 ReClass Original Original Original OriginalReturn on Common Equity 8.0545 10.524 11.2735 11.9442 9.0196 Tax Burden 62.8453 61.4696 63.9003 64.7623 58.7975 Interest Burden 81.2874 84.8746 88.0114 89.5444 87.2226 EBIT Margin 2.7268 2.6149 13.1166 12.9876 11.4513 Asset Turnover 1.8327 2.1272 0.4062 0.3872 0.3585 Financial Leverage 3.1549 3.6263 3.7619 4.0952 4.2844Related RatiosAnnualized Return on Common Equity 8.0545 10.524 11.2735 11.9442 9.0196Operating ROE 8.4119 10.721 11.7781 13.203 10.94485 Year Average Return On Equity 7.4143 6.8759 7.5742 9.4792 10.1632Return on Equity - 5 Yr Geometric Growth -34.409 -4.4531 7.6938 37.6258 10.0031Source: The Bloomberg Professional Service
  • Rich Tullo Trading Desk Analyst rtullo@albertfried.com (212) 422 – 7282 September 22, 2009PUBLICIS GROUP (OTC: PUBGY) NO TARGET NOT RATEDDESCRIPTION: PRICE $40.59Publicis Groupe S.A. (Publicis) is engaged in the provision of traditional advertising services, specialized agencies CLOSEand marketing services (SAMS) and media services, which, during the fiscal year ended December 31, 2008,represented respectively 38%, 36% and 26% of revenues. Publicis provides a range of advertising and communi-cations services, designing a customized package of services. These services fall into three major categories:classic traditional advertising, SAMS, which include digital services, media consulting, and media buying services. MCAP 7.9bbIn May 2009, the Company announced the acquisition of Publicis MARC, the Bulgarian integrated communica-tions agency. Publicis MARC offers a range of communication services, including advertising, public relations,media consultancy, Web and event marketing, sales promotions, direct marketing and production. In April 2009,the Company acquired Nemos, the Zurich-based digital agency in interactive communication. SHARES 196mm OUT. RECENT EVENTS 52 WEEK • September 16, 2009: Publicis Mojo has been appointed as the creative agency for e-commerce busi- HIGH $40.65 ness PayPal following a competitive pitch. • September 4, 2009: -French advertising company Publicis Groupe SAs (PUB.FR) revenue is set to be up in August compared with July, and then improve again in September, Chief Executive Maurice Levy told Dow Jones Newswires Friday. 52 WEEK $18.85 • September 10, 2009: Publicis Groupe SA has agreed to acquire Microsoft Corp.s digital ad firm, LOW Razorfish, for about $530 million, as the French advertising giant seeks to bolster its digital revenue. AVG. VOL. 5,238 10DY SHORT 2010 INT. SHS. P/BV NA EV/ 6.7x EBITDA P/E 13.4x FY: 2009 See important notes, disclosures and disclaimers on page 33-36 before making investment decisions.
  • Publicis Group Financial Statement AnalysisIn millions except per share and % figures USD as of 9/16/09 FY 2004 FY 2005 FY 2006 FS1 2007 FS2 2007 FY 2007 FS1 2008 FS2 2008 FY 2008 ReClass Original Original Original Original Original Original Original OriginalIncome StatementRevenue 4,762.53 5,128.15 5,503.16 2,987.46 3,415.59 6,391.15 3,403.50 3,480.66 6,883.39Operating Income 684.80 777.86 864.50 427.92 585.01 1,020.72 489.27 612.42 1,106.26Pretax Income 270.94 709.52 829.36 397.35 532.85 926.31 432.70 549.21 986.27Income bef XO items 377.82 514.43 588.46 280.41 373.56 651.29 304.27 391.89 699.46Net Income 345.51 479.64 555.84 263.13 358.05 618.45 293.56 358.18 654.10Basic EPS Before Abnormal Items $2.91 $2.47 NA $1.26 NA $2.98 $1.41 $1.77 $3.29Basic EPS $1.64 $2.27 $2.65 $1.26 $1.78 $2.98 $1.44 $1.77 $3.23Diluted EPS Before Abnormal Items NA NA NA $1.18 NA $2.76 $1.33 $1.73 $3.15Diluted EPS $1.60 $2.19 $2.47 $1.18 $1.49 $2.76 $1.36 $1.73 $3.10Dividends per Share $0.37 $0.45 $0.45 $0.00 NA $0.68 NA NA $0.88EBITDA 868.74 950.58 1,026.35 520.95 682.27 1,210.91 587.13 709.34 1,300.88Actual Sales Per Employee 130,896.32 132,819.23 137,789.25 NA 77,967.27 145,890.15 75,759.64 77,820.10 153,897.97Return on Common Equity 23.61 20.79 21.27 21.60 21.13 21.13 21.57 19.79 19.79Balance SheetTotal Current Assets 7,258.97 8,461.78 9,542.24 9,162.52 10,298.59 10,298.59 10,801.19 9,288.18 9,288.18Total Long-Term Assets 6,099.98 5,434.90 5,792.61 7,238.77 7,556.96 7,556.96 7,663.43 7,259.49 7,259.49Total Assets 13,358.95 13,896.68 15,334.85 16,401.29 17,855.55 17,855.55 18,464.62 16,547.67 16,547.67Total Current Liabilities 7,863.55 8,244.05 9,079.31 9,787.97 11,720.44 11,720.44 12,558.90 10,458.79 10,458.79Total Long-Term Liabilities 3,245.19 3,161.78 3,476.62 3,578.09 2,890.37 2,890.37 2,843.50 2,810.03 2,810.03Total Liabilities 11,108.73 11,405.83 12,555.93 13,366.07 14,610.81 14,610.81 15,402.40 13,268.83 13,268.83Total Shareholders Equity 2,250.21 2,490.85 2,778.92 3,035.22 3,244.74 3,244.74 3,062.23 3,278.84 3,278.84Shares Outstanding 182.09 184.07 183.60 184.12 183.60 183.60 175.95 178.85 178.85Book Value per Share $12.13 $13.40 $14.94 $16.27 $17.46 $17.46 $17.20 $18.10 $18.10Tangible Book Value per Share ($12.91) ($10.04) ($10.44) ($16.04) ($17.27) ($17.27) ($19.92) ($16.90) ($16.90)Equity Ratio(%) 16.84 17.92 18.12 18.51 18.17 18.17 16.58 19.81 19.81Cash FlowsNet Income 345.51 479.64 555.84 263.13 358.05 618.45 293.56 358.18 654.10Cash From Operating Activities 965.68 770.40 744.04 338.88 765.44 1,091.87 102.44 910.20 1,046.26Cash From Investing Activities 302.01 (50.95) (124.22) (1,118.97) (334.09) (1,476.36) (107.03) (234.57) (346.80)Cash From Financing Activities (1,205.55) 362.84 (613.55) (34.55) (414.44) (437.84) (446.46) (896.15) (1,360.88)Net Changes in Cash 62.14 1,082.29 6.27 (814.64) 16.92 (822.33) (451.05) (220.53) (661.41)Free Cash Flow 836.43 667.27 642.41 292.37 690.73 971.47 36.70 841.37 911.64Free Cash Flow per Basic Share $3.97 $3.17 $3.06 $1.40 $3.43 $4.68 $0.18 $4.15 $4.50Free Cash Flow per Diluted Share $3.57 $2.85 $2.68 $4.34 $4.03 $4.06 $3.14 $4.37 $4.13Cashflow per Share $4.59 $3.66 $3.55 $1.62 $3.80 $5.26 $0.50 $4.49 $5.17Source: The Bloomberg Professional Service
  • Publicis GroupROE Analysis in % FS2 2006 FS1 2007 FS2 2007 FS1 2008 FS2 2008 Original Original Original Original OriginalReturn on Common Equity 21.3 21.6 21.1 21.6 19.8 Tax Burden 67.0 67.3 66.8 67.5 66.3 Interest Burden 95.9 94.8 91.9 89.9 89.2 EBIT Margin 15.7 15.5 15.8 15.8 16.1 Asset Turnover 0.4 0.4 0.4 0.4 0.4 Financial Leverage 5.6 5.7 5.6 5.8 5.3Related RatiosAnnualized Return on Common Equity 24.8 18.4 23.0 18.6 24.0Operating ROE NA NA NA NA 17.55 Year Average Return On Equity 22.6 22.2 21.7 21.8 21.1Source Bloomber Professional Service
  • Rich Tullo Trading Desk Analyst rtullo@albertfried.com (212) 422 – 7282 September 22, 2009HAVAS GROUP S.A. (OTC; HAVSF) NO TARGET NOT RATEDDESCRIPTION: PRICE $3.00Havas offers a range of communication consulting services to its clients. The Company principally operates in CLOSEFrance, Europe (excluding France and the United Kingdom), United Kingdom, North America and others. TheCompany has two business units HAVAS Worldwide and HAVAS Media. HAVAS Worldwide includes the Euro RSCGWorldwide network and a number of agencies with a local identity: Arnold in the United States and Italy, H and Win France, Palm+Havas in Canada. HAVAS Media is made up of the MPG, Arena, HAVAS Sports and Entertain- MCAP 1291.9mmment and HAVAS Digital networks. On December 4, 2008, HAVAS International merged into the Company bymeans of a complete transfer of assets and liabilities. SHARES 429.9m OUT. RECENT EVENTS 52 WEEK • September 8, 2009: Laurent Habib has appointed Managing Director of Havas in France. HIGH $3.05 The Havas Group has created a new position of Managing Director France and appointed Laurent Habib to fill it. • August 31, 2009: Net income remained stable at E40 million (excluding a non-recurring capital 52 WEEK $1.60 gain), despite organic growth of -9.2%, thanks to only a slight drop in income from operations which LOW was offset by an improvement of the financial result. • June 26, 2009: Peugeot said in a statement that it would keep Frances Havas (EURC.PA) and its MPG network, and OMD, which is part of U.S. advertising group Ommicom (OMC.N). It did not say AVG. VOL. 3,874 how many firms it previously had been using. 10DY SHORT NA INT. SHS. P/BV 0.75x EV/ 6.7x EBITDA P/E 13x FY: 2009 See important notes, disclosures and disclaimers on page 33-36 before making investment decisions.
  • HAVAS GROUPFINACIAL STAEMENT ANALYSISIn millions of USD as of 9/16/09 except per share and % figures FY 2004 FY 2005 FY 2006 FS1 2007 FS2 2007 FY 2007 FS1 2008 FS2 2008 FY 2008 ReClass Original Original Original Reclass ReClass Original Original OriginalIncome StatementRevenue 1,853.06 1,815.42 1,846.94 968.80 1,131.95 2,096.18 1,154.38 1,141.96 2,294.46Operating Income 213.77 159.05 151.82 99.67 132.51 231.24 125.38 148.89 275.10Pretax Income 108.13 101.89 99.12 73.09 105.72 177.87 110.09 117.99 228.28Income bef XO items 78.30 84.50 67.75 51.83 73.30 124.51 79.51 84.28 163.89Net Income 68.36 73.31 57.72 46.51 67.66 113.57 74.92 77.25 152.18Basic EPS Before Abnormal Items NA NA NA NA NA $0.26 $0.17 $0.18 $0.35Basic EPS $0.20 $0.17 $0.14 $0.11 $0.16 $0.26 $0.17 $0.18 $0.35Diluted EPS Before Abnormal Items NA NA NA NA NA 0.26 0.17 0.18 0.35Diluted EPS $0.20 $0.17 $0.14 $0.11 $0.16 $0.26 $0.17 $0.18 $0.35Dividends per Share $0.09 $0.04 $0.04 NA NA $0.05 NA NA $0.06EBITDA 278.39 236.09 198.24 120.93 159.29 279.13 151.37 175.58 327.78Actual Sales Per Employee NA NA NA NA NA 24,094,000.00 NA NA 25,780,500.00Return on Common Equity 7.73 6.81 4.94 6.41 8.66 8.66 10.04 10.46 10.46Balance SheetTotal Current Assets 2,608.08 2,690.82 3,071.72 3,135.40 3,833.90 3,833.90 4,012.68 3,991.81 3,991.81Total Long-Term Assets 2,246.15 2,054.21 2,213.11 2,296.05 2,391.63 2,391.63 2,610.60 2,299.37 2,299.37Total Assets 4,854.23 4,745.03 5,284.83 5,431.45 6,225.53 6,225.53 6,623.28 6,291.18 6,291.18Total Current Liabilities 2,716.52 2,929.85 2,997.86 3,031.16 3,637.03 3,637.03 4,379.33 4,224.82 4,224.82Total Long-Term Liabilities 1,037.00 720.63 1,043.25 1,078.98 1,162.27 1,162.27 731.72 650.19 650.19Total Liabilities 3,753.52 3,650.48 4,041.11 4,110.14 4,799.30 4,799.30 5,111.05 4,875.00 4,875.00Total Shareholders Equity 1,100.71 1,094.55 1,243.72 1,321.31 1,426.23 1,426.23 1,512.23 1,416.18 1,416.18Shares Outstanding 421.40 425.61 428.33 429.76 429.85 429.85 429.87 429.87 429.87Book Value per Share $2.61 $2.57 $2.89 $3.07 $3.31 $3.31 $3.51 $3.29 $3.29Tangible Book Value per Share (1.91) (1.54) (1.50) (1.46) (1.44) (1.44) (1.65) (1.38) (1.38)Equity Ratio(%) 22.68 23.07 23.53 24.33 22.91 22.91 22.83 22.51 22.51Cash FlowsNet Income 68.36 73.31 57.72 46.51 67.66 113.57 74.92 77.25 152.18Cash From Operating Activities 192.64 (47.22) 107.91 (1.33) 373.56 361.22 (50.46) 456.50 427.29Cash From Investing Activities (74.57) (54.67) (63.99) (54.49) (35.24) (90.31) (102.44) (51.97) (152.18)Cash From Financing Activities (274.67) 106.86 (67.75) (51.83) (49.34) (101.25) 107.03 39.33 143.40Net Changes in Cash (156.60) 4.97 (23.84) (107.64) 288.98 169.66 (45.87) 443.86 418.51Free Cash Flow 146.65 (93.19) 69.01 (26.58) 345.37 307.86 (84.09) 422.79 359.97Free Cash Flow per Basic Share $0.43 ($0.22) $0.16 ($0.06) $0.80 $0.72 ($0.20) $0.98 $0.84Free Cash Flow per Diluted Share $0.43 ($0.21) $0.16 $0.77 $0.70 $0.70 $0.63 $0.84 $0.84Cashflow per Share $0.57 ($0.11) $0.25 ($0.00) $0.87 $0.84 ($0.12) $1.06 $0.99Source: The Bloomber Professional Service
  • HAVASROE Analysis In % FS2 2006 FS1 2007 FS2 2007 FS1 2008 FS2 2008 Original Original Reclass Original OriginalReturn on Common Equity 4.94 6.41 8.66 10.04 10.46  Tax Burden 58.23 61.22 63.85 65.99 66.67  Interest Burden 65.29 70.00 76.92 83.52 82.98  EBIT Margin 8.22 9.45 11.03 11.30 11.99  Asset Turnover 0.37 0.38 0.37 0.38 0.36  Financial Leverage 4.30 4.22 4.32 4.26 4.41Related RatiosAnnualized Return on Common Equity 5.44 7.32 9.85 10.13 11.16Operating ROE NA NA NA NA 10.375 Year Average Return On Equity 6.61 6.34 6.38 7.02 8.10Source: The Bloomber Professional Service
  • Price Chart 8/18/09 RATING: BUY TARGET: $9.00 PRICE: $5.64
  • Price Chart 09/21/09 RATING: BUY TARGET: $11.00 PRICE: $7.00
  • Price Chart 09/21/09 RATING: BUY TARGET: $48.00 PRICE: $37.00
  • Research at Albert Fried & Company LLC © Copyright 2009IMPORTANT DISCLOSURESThe Albert Fried & Company LLC Equity Research rating system consists of BUY, MARKET PERFORM and SELL recommendations. NC, denotes “Not Cov-ered”.BUY suggests capital appreciation of at least 30% from initiation of coverage over the next 12 months, while MARKET PERFORM denotes that a stock isnot likely to provide similar gains over a 12-month period and SELL suggests a price decline of 30% over the next 12-month period .As of 08/09/09, Albert Fried & Company LLC provides research on 7 companies, of which 5 (60%) are rated BUY and 1 (20%) is rated Market Performand is rated SELL 1 (20%) .Of the BUYS, Albert Fried & Company, LLC has received investment banking income from 0 companies (0%).Of the Buys 0 (0%) trade above and 5 (72%) trade below our price targets.Of the Market Performs, 1 (14%) trades above and 0 (0%) trade below our price targets.Of the Sells. 1 (14%) trades above and 0 (0%) trade below our price targets.Any estimates or forecasts may not be met. This report contains forward-looking statements, which involve risks and uncertainties. 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