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| | Stock-market value: $4.8 billion
Prestige clients: General Motors, Johnson & Johnson, Microsoft, Nestlé
Scope: 60 companies, 49,000 employees; does business in 130 countries
Sources of revenue: U.S., 56%; Europe, 19%; Great Britain, 10%; Asia-Pacific, 7%; elsewhere, 8%
Telephone: 212-704-1200
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December 2004  Email this  Print this
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STOCKS
An Ad Agency Comes Up for Air
by Jeffrey R. Kosnett
Most people think the advertising business is a glamorous world full of lavish parties, beautiful people, and money, money, money. But for investors, the reality can be starkly different. The past few years have been particularly nightmarish for shareholders of Interpublic Group, the world's fourth-largest advertising company. Plagued by an ad recession, accounting woes, unsuccessful acquisitions and the loss of some key clients, the company has seen profits deteriorate steadily since 2000. The company -- which consists of about 60 units involved in advertising, public relations and specialized marketing services -- reported six straight quarterly losses through the middle of 2004 and eliminated its dividend last year.
The stock (symbol IPG), which traded as high as $58 in late 1999, was $11 in mid October. Analysts are tepid: Of the 17 who follow Interpublic, ten advise holding the stock, four suggest selling and only three recommend buying, according to Thomson First Call.
A high-teens stock?
However, some fund managers with a nose for bargains are intrigued. Robert Olstein, the boss of Olstein Financial Alert, has been buying the stock. So has Sound Shore fund. "You don't have to make herculean assumptions to see this stock in the high teens or mid $20s," says Mark Curwin, a Sound Shore analyst.
The mid $20s may seem a stretch, but several developments could give the stock a boost. Ad spending is improving -- it was up 6.4% in the U.S. in the first half of 2004. Interpublic's long-term debt, which stood at $2.5 billion three years ago, has been cut to $1 billion. And the company is probably finished spilling red ink, with analysts expecting small profits in both the third and fourth quarters of 2004.
Just as important, company executives must convince investors that the excesses of the past are over. The organization must erase a laissez-faire culture that, as Curwin says, spawned "empires and kingdoms" and encouraged an earlier management team to go on a costly acquisition binge. The most egregious purchase: a British auto-racing tour, racetracks and all. Interpublic will be free of this boondoggle by the end of the year, but not before swallowing $125 million in losses.
David Bell, who became chief executive officer in March 2003, says 2004 is "the first year of our turnaround process." He has resolved to discourage acquisitions, control costs, and focus on growth at the advertising and public-relations firms already in the Interpublic stable.
How cheap?
The stock is not dirt-cheap, but it is cheap enough to be tempting. With the company expected to earn just 21 cents a share in 2004, the price-earnings ratio on this year's estimate isn't too meaningful. The stock sells for 17 times next year's estimated profits of 66 cents a share. That P/E is in line with the overall market's but far below the 25 to 30 times earnings that Interpublic's shares commanded between 1997 and 2001.
If you evaluate Interpublic on a price-to-sales basis, the shares look even cheaper. The stock is valued at just 80% of the past 12 months' revenues of $6 billion. Interpublic's biggest rivals -- Omnicom and WPP Group (both of which are profitable) -- sell at 1.5 times revenues. In the past, ad-agency buyouts have gone for up to two times revenues (although Interpublic says it's not for sale).
There's no question that Interpublic is speculative. But if the new leadership team succeeds in shaking up the company, the stock should gain ground over the next few years.
--Research: Amy Esbenshade Hebert |
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MAGAZINE
