Interpublic (IPG) Benefits From Organic Growth Amid High Debt

So far this year, shares of The Interpublic Group of Companies, Inc. IPG have gained 8.7% against the 0.8% decline of the industry it belongs to.

 

Recently, the company delivered impressive third-quarter 2019 results, with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings of 49 cents per share beat the consensus mark by a penny and improved on a year-over-year basis. Total revenues of $2.44 billion beat the consensus estimate by 17.7% and increased 6.1% on a year-over-year basis.

Interpublic has an impressive earnings surprise history, having outpaced estimates in each of the last four quarters. The company delivered average positive earnings surprise of 24.9%.

What’s Driving Interpublic?

Solid Business Model

Interpublic’s digital capabilities, diversified business model and geographic reach offer distinct competitive advantage. The company is expected to achieve targeted levels in the upcoming quarters, based on diversification across emerging regions and collaboration/integration across agencies through technological improvement. It continues to look for investment opportunities and acquisitions to expand in high-growth regions and key global markets.

Robust Organic Growth

Interpublic’s top line continues to grow organically driven by growth across its major geographic regions and contributions from net client wins and net higher spending from existing clients (especially in the healthcare sector). The company witnesses organic growth in the United States backed by media and advertising disciplines. Strong performance of advertising and media businesses in Continental Europe, Latin America and the U.K. regions also boost organic growth.

In the first nine months of 2019, organic net revenue growth was 3.5%. For 2019, the company expects organic revenue growth of 2-3%.

Acquisitions: A Major Growth Catalyst

Interpublic has been continuously acquiring and investing in companies globally to expand product portfolio as well as adapt to rapidly changing marketing services and the media market. During the first nine months of 2019, the company acquired a content communications agency based in the U.K. In the first nine months of 2019, net acquisitions had a positive impact of 8.8% on Interpublic's top-line growth.

In 2018, the company completed three acquisitions. These include the buyout of data-related and analytical services provider, Acxiom LLC in October; London-based social creative agency That Lot through its subsidiary — Weber Shandwick — in July; and Brazil-based digital marketing and technology agency, Cappuccino in May. Full-year 2018 revenues include $181.7 million in relation to the Acxiom acquisition and a positive impact of 1.8% from net acquisitions.

Risks

In spite of significant growth prospects, Interpublic is not free from headwinds. The company has a debt-laden balance sheet. As of Sep 30, 2019, total debt was $3.62 billion while cash and cash equivalents were $520.5million. High debt may limit the company’s future expansion and worsen its risk profile.

Client/Customer concentration can be a major hindrance to Interpublic’s business. Its cash position is affected by seasonality in business.Global presence makes it vulnerable to the risks associated with foreign currency exchange rate fluctuations. Notably, the company's top line was unfavorably impacted by foreign currency translation of 2.1% during the first nine months of 2019.

Zacks Rank & Stocks to Consider

Currently, Interpublic carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader Zacks Business Services sector are Global Payments GPN, Mastercard MA and Cardtronics CATM. While Global Payments sports a Zacks Rank #1 (Strong Buy), Mastercard and Cardtronics carry a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected EPS (three to five years) growth rate for Global Payments, Mastercard and Cardtronics is 17%, 15.9% and 4%, respectively.

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