OMC - Omnicom: Old Economy Meets AI Buy The Dip

2023-09-12 08:10:00 ET

Summary

• Omnicom is an advertising giant that's increasingly leveraging AI to explore new business opportunities.
• OMC's been able to demonstrate organic growth and maintains decent margins.
• The recent dip in price presents a good buying opportunity as it pays a well-covered dividend that's positioned to grow.

Omnicom (OMC) hasn't been one of my best performers this year, as the stock is down by 15.6% since my last 'Buy' rating back in April of this year. However, I hardly view the investment thesis as being broken, and I firmly believe that it's a market for stocks rather than the stock market.

As shown below, OMC is now trading well below its 52-week high of $99, and in this article, I show why income growth investors may find this high-quality player appealing on the recent dip, so let's dive in.

Why OMC?

Omnicom strikes me as being an above average company that's currently trading at a below average price. That's because it's the second largest of the Big 5 advertising conglomerates, with a presence in over 70 countries. It provides advertising, strategic media planning, precision marketing, and brand consulting services, to name a few, to over 5,000 clients globally, and in the last 12 months, generated $14.4 in total revenue.

As anyone who's followed the media landscape over the past several years may know, the industry is currently undergoing a significant transformation, as traditional linear TV is giving away share to OTT (over-the-top) streaming services like Netflix (NFLX), and this has required players like Disney (DIS) and Comcast (CMCSA) to adapt with their own streaming services like Disney+ and Hulu. Plus, brands have also had to shift advertising models online.

This has been disruptive for the advertising giants as well, but also creates opportunity. As shown below, OMC has yet to fully recover its revenue run-rate to its pre-2020 peak, but has seen its operating margin steady grow over the past 10 years from under 13% to 14.5% over the trailing 12 months, due to benefits from growth in scale and from efficiency drivers.

OMC is also seeing near-term growth, as organic revenue grew by 3.4% and 4.3% YoY for Q2 and the first half of the year, respectively. This was driven by its core advertising and media business, which grew sales by 5.1% while its other segments saw low single digit growth in the 2-4% range.

Also encouraging, OMC is demonstrating solid "GDP+" attributes, as it's been able to grow its top line faster than expenses, as reflected by operating expense growth of just 1.1% in Q2 compared to the prior year period. As shown below, OMC's EBITDA margin is in line with that of advertising peers Interpublic Group (IPG) and Publicis Groupe (PUBGY).

The growth thesis for OMC lies in its continued evolution as it leverages AI to seek out opportunities and improve productivity. This includes massive opportunities in the Generative AI space across OMC's treasure trove of 1 billion IDs globally with data from first, second, and third parties. Management expects for this to be of high value to the more than 50K people who use the platform globally in over 100 countries to harness and activate this rich set of data.

Moreover, OMC's recently announced acquisition of Outpromo and Global Shopper, two of Brazil's leading commerce and retail media agencies, give it access to one of Latin America's fastest growing economies. Management expects to see strong synergies as it integrates these two acquisitions into the Omni Commerce Platform.

Concerns around OMC include a potential slowdown in Asia, particularly in China, whose growth has stalled as of late. While China was a bright spot for OMC in the first half of the year due to its ending of lockdowns, that growth may be short-lived due to economic challenges there. Also, OMC should be regarded as a cyclical company, since its clients will typically cut sales and marketing budgets first in the event of a recession, and that's something investors should be mindful of should higher interest rates trigger more economic uncertainty.

Meanwhile, OMC carries a strong BBB+ rated balance sheet with a net debt to EBITDA ratio of just 1.5x. Income investors may also appreciate the fact that the stock currently yields 3.6% and the dividend is well-covered by a 39% payout ratio. While dividend growth has been lacking since 2022, OMC's transformational efforts could translate to a resumption of growth. This may be supported by analyst estimates for 6-7% annual EPS growth over the next 2 years.

Considering the potential aforementioned catalysts in place, OMC appears to be too cheap at the current price of $78.90 with a forward PE of just 10.7, sitting far below its normal PE of 16.1. With the market pricing in such low expectations for the stock, I believe even execution of mid-single digit bottom line growth over the near-term could more than justify the current discounted valuation.

Investor Takeaway

The market has been down on Omnicom as of late, but there are potential catalysts in place that could drive the stock higher over the medium term. This includes continued AI-driven services and efficiency gains, plus opportunities from its recent acquisitions and from strong growth in Latin America. Additionally, the stock appears to be too cheap at current levels with a forward PE of just 10.7 and offering a 3.6% dividend yield, making it an attractive buy for income growth investors looking to add exposure in the media space.

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