Al Fried Llc Custom Analytics Report Mdca (2711 Exempt) 062409
Rich Tullo Trading Desk Analyst firstname.lastname@example.org (212) 422 – 7282 June 24, 2009 Internal Distribution OnlyMDC Partners Inc.NASDAQ: MDCA BUYPrice: $5.64 Price Target: $9.00 Stock ChartMCAP.: 178mm Shares Out.: 28mmAvg. Vol. 39,000 Short Int.: 17,89110 day:52 Week 52 Week $8.76 $2.19High: Low: Year 2007 2008 2009E 2010EEV/EBITDA: 4x P/BV: 1.8 Revenue 547,319 584,648 580,472 636,570 EPS ($1.05) $0.00 $0.14 $0.34Notes: GAAP Earnings include $0.34 and $0.48 in non-cash executive stock compensation expenses in 2007 and 2008. Estimates include $0.31 and $0.34 in non-cash executive stock compensation.Initiate Coverage of MDCA with a BUY Rating and $9.00 Target, We Like MDCA’s Strate-gic Position and Prospects for Market Share Gains in 2009-2010Key Points:• We think MDC Partners (NASDAQ: MDCA BUY) shares are attractive; prior to a rebound in global Ad spending, we ex- pect MDCA to benefit from increased spending on creative advertising services.• MDCA has limited top-line exposure to auto manufacturers as its clients (Volkswagen and BMW ) have had only mod- est sales declines (-12% and -27% respectively) as compared to U.S. domestic manufactures (–36% to –42%).• We like MDCA’s core clientele of fast food and family restaurants such as Burger King (NYSE BKH, NC) and Domino’s Pizza (NYSE: DPZ) as they are stable advertisers in our view.• We expect MDCA to offset a $30 million decline in CRM revenue in 2009 with an increase in SMS or agency revenue.• MDCA’s balance sheet has improved and we expect MDCA to retire its 8%, $45 million, CDN 2010 convertible bonds with its existing credit lines and the cash balances.• We derive our $9 target by applying a 6x peer group EV-to-EBITDA multiple to our 2010 $68 million EBITDA estimate. Our target implies roughly 57% upside from the current price. Thus we initiate coverage with A BUY rating. See important notes, disclosures and disclaimers on page 6,7 before making investment decisions.
Company Overview: MDC Partners, Inc. is and advertising industry holding company. MDCA, through its subsidiaries, provides marketing .communications services primarily in the United States, Canada, Europe, Jamaica, and Philippines. It operates through three segments:Strategic Marketing Services, Customer Relationship Management, and Specialized Communication Services. MDC Partners also offersadvertising, retail and event marketing, and consumer promotion services. The company was formerly known as MDC Corporation, Inc.and changed its name to MDC Partners, Inc. in January 2004. MDC Partners, Inc. was founded in 1980 and is headquartered in Toronto,Canada.MDCA benefits more from the growth in Internet and interactive advertising, compared with its peer group, since roughly 40% of the com-pany’s business is in digital innovation and direct response. Since 2005, MDCA’s advertising revenue expanded roughly 42%, comparedwith 30% for the peer group and 47% for Internet advertising, because MDCA’s agencies are industry thought leaders and delivered suc-cessful interactive ad campaigns.Specifically, MDCA’s two largest agency holdings, Crispen Porter and Bogusky (CP+B) agency and Kirshenbaum Bond and Partners (KBP)have won agency awards and more importantly high profile clients. In 2008, CP+B began work on the Microsoft (NASD: MSFT, NC) andBest Buy (NYSE; BBY, NC) campaigns and KBP began work on Wendy’s (NYSE: WEN,NC). We think CP+B’s strength is selling to the 18-30year-old age demographic (also know as the millennial generation) and KBP strong suit is selling to mature tech-savvy customers.MDCA’s largest Auto manufacturing client, Volkswagen, just surpassed Ford in global market share: We think MDCA’s SMS sales visibilityis strong versus the holding company peer group with exposure to the Big Three US Auto manufactures. MDCA benefits from Volks-wagen’s strategic goals and its commitment to maintain ad spending. Currently, Volkswagen sells about 700,000 vehicles in the US andplans to increase US sales to 1.3 million units by offering fuel efficient clean-diesel cars made in Europe, the US and Brazil. In contrast,to U.S. automakers (which have cut ad spending by roughly 50%) Volkswagen plans maintain its current level of ad spending according tocomments made by Volkswagen’s marketing manager Tim Ellis. In May, Volkswagen sales were down just 12% versus lower sales at theBig Three and Toyota which where down 33% and 41% respectively (according to Auto Data) and we credit Volkswagen performance toinvestment in advertising.MDCA will benefit, in our view, from consumer electronics in 2009 : We expect MDCA to benefit from the new Microsoft Windows(NASDAQ: MSFT) 7.0 launch in 3Q:09: The aforementioned CP+B is also the agency of record for Microsoft’s Windows products. CP+Bwas hired by Microsoft to help 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 the run-up to it’s its windowslaunch and offset weakness MDCA might incur owing to a recessionary economy. As CP+B is Best Buy’s creative Ad Agency we think thecompany will benefit from increasing competition between Wal-Mart and Best Buy and the surge in new consumer electronics such assmart phones and LED TV’s.As ad rates remain challenged we expect MDCA’s fast food clients to maintain advertising budgets: MDCA’s revenue is weighted to fast-food and family restaurants -owing to its strength with millennials. MDCA’s clients include; Burger King (NYSE: BKC), Wendy’s (NYSE:WEN,NC), Dominoes Pizza (NYSE: DPZ, NC) , Arby’s (is division of NYSE:WEN, NC), International House of Pancakes (NYSE:IHOP,NC), PFChangs (NYSE: PFC, NC), Churches Chicken and Subway (in Canada). We think, fast service restaurants benefit as budget conscious con-sumers switched from higher priced restaurants. The restaurant business is highly competitive and advertising intensive. As ad ratesacross all media have plummeted; restaurant ad budget have stayed the same or increased as advertisers can buy more media impres-sions per dollar.As MDCA’s margins improve ; we expect MDCA to pay down debt. Owing to its acquisition strategy from (2001 to 2006) MDCA has largenon-cash expenses therefore GAAP earnings in our view is not the best measure of MDCA’s income. We use EBITDA (defined as Earningsbefore interest , taxes, depreciation minority interest) and as MDCA’s EBITDA expanded to $41 million in 2008 from $31 million in 2007cash on its balance sheet has expanded to $46 million at the end of 1Q:09. Thus the $45 million in MDCA 8% convertible notes comingdue in 2010 are not a great risk, in our opinion as, MDCA has ample liquidity.Risks to Thesis: MDCA through its Accent CRM division operates call centers for Sprint. Sprint had been losing market share and inves-tors became concerned about MDCA’s CRM franchise. Ironically as Sprint has improved its service offering high touch customer com-plaints have declined. Thus the need for CRM services has diminished. As a result we expect CRM revenues to decline about $35 millionin 2009. While we think our estimates are realistic MDCA failure to offset CRM revenue with SMS sales could result in down-side to ourestimates.Estimates and Target: Despite a decline in CRM revenue, we expect only a modest decline in MDCA’s top-line (to $580 million in 2009from $584 in 2008). As MDCA cuts cost we expect EBITDA to grow roughly 15% to $53 million in 2009 (from $46 million in 2008) and amodest gain in EPS to $0.14. As the global economic outlook improves in 2010, we expect MDCA’s top-line to expand 10%, EBITDA toexpand 28% to $68 million and EPS to nearly double to $0.34.We value MDCA by using the ratio of EV-to-EBITDA. We think the overhang related to MDCA’s CRM franchise creates an opportunity toBUY MDCA shares at a discount to its peers. MDCA’s current $5.70 price level implies an EV/EBITDA multiple of roughly 4x which is asignificant discount to the 6x peer group multiple. To derive our $9 target, we apply a 6X multiple to our $68 million 2010 EBITDA esti-mate. We argue MDCA deserves a least a peer group multiple as MDCA is a industry thought leader with exposure to growing clients andwith almost 60% upside to our target we think investors should BUY MDCA shares.