2023-08-11 02:39:51 ET
Summary
- Stagwell Inc. sees healthy growth in international markets with a 9% increase in organic revenue outside North America.
- The company's strategic investments in Latin America and integrated approach to global client services present potential areas of growth.
- However, Stagwell's recent performance and vulnerabilities in the U.S. market warrant a cautious assessment of its immediate prospects.
Thesis
Stagwell Inc.'s (STGW) international markets show healthy growth with a 9% increase in organic revenue outside North America, the overall picture is less optimistic. The reported Q2 earnings per share ((EPS)) of $0.16 misses expectations by $0.05, and revenue of $632.27 million represents a 6.04% decline year-over-year, falling short by $45.69 million. Amid these mixed results, this analysis argues that Stagwell's strategic investments in regions such as Latin America and its integrated approach to global client services mark key areas of potential growth, yet the company's recent performance and potential vulnerabilities in the U.S. market invite a more cautious assessment of its immediate prospects.
Company Overview
Stagwell Inc., a New York-based company, operates within the domain of digital technology, structured around three principal business segments: Integrated Agencies Network, Brand Performance Network, and Communications Network. The Integrated Agencies Network focuses on digital platforms encompassing content delivery and commerce; the Brand Performance Network offers advanced technological solutions including AI and augmented reality tools; while the Communications Network emphasizes strategic advertising, live events, and public relations services. Complementing these segments, Stagwell's Marketing Cloud provides a suite of software-as-a-service (SaaS) and data-as-a-service (DaaS) solutions, positioning the company as an integrated provider in the modern digital landscape.
Stagwell's Q2 Earnings Highlights
The international market appears to be a robust engine of growth for Stagwell, with an organic revenue increase of 9% beyond North America's shores. Diving into the geographical divisions, Asia-Pacific and EMEA regions showed impressive gains of 17% and 8% respectively over the same period in the preceding year.
Latin America emerges as another focal point in Stagwell's global strategy. The company's CEO, Mark Penn, has drawn attention to various transactions that are currently underway and aimed at enhancing Stagwell's capabilities in the region. As emphasized by Penn, forming a complete network within Latin America stands as a top priority. Observing the growth rates, investors might see that as a substantial launching pad for expansion within these international operations. Further commitment to growth in EMEA is also on the horizon, with particular attention directed toward the Mideast, reflecting a concerted effort to strengthen Stagwell's presence in these markets.
Integration appears to be at the core of Stagwell's approach. Their strategy for delivering integrated services to the largest global clients is progressing methodically. Evidence of this progress can be seen with the company's top clients, who now account for about 50% of net revenue, having grown 15% organically year-over-year.
Investors should also take note of the Stagwell Marketing Cloud Group. Divided into two principal sectors, software platform products, driven mainly by SaaS revenue, and advanced media platforms, fueled by advertising and sponsorships, this division has been a significant contributor. They delivered more than $48 million in net revenue, marking a 29% increase from the prior comparable period. Of this revenue, $35 million originated from advanced media platforms, while approximately $13 million was garnered from software platform products. The management's view is that ongoing investments in this group will bring about increased margins as they attain greater scale.
Alongside the share repurchasing activities and the effort to bolster the long-term balance sheet, Stagwell has navigated its leverage to 3.48 times. If you were to exclude the effect of share repurchases, this figure would be closer to three times, consistent with the second quarter of 2022. Overall, Stagwell appears committed to a course that aims to bring net leverage down to two times over a medium-term horizon.
Finally, an outlook for the full year shows Stagwell's expectation for organic net revenue growth to lie in the range of zero to 2%, with adjusted EBITDA between $410 million and $440 million. This projection, coupled with the expected delivery of 50% to 60% free cash flow conversion and adjusted earnings per share between $0.76 and $0.85, brings a sense of cautious optimism.
Performance
The numbers are telling (see data below). Over the span of just over five years, from January 2018 to August 2023, the trend emerges that Stagwell's performance stands in stark contrast to broader market metrics with the glaring -6.87% annualized rate of return (without dividends).
I imagine that investors looking at the opportunity cost would naturally feel frustrated, as the same investment in the broader market index, the S&P 500 Index, would have yielded an annualized ROR of 9.27%, or 10.61% when dividends are factored in.
Overall, STGW's share price paints a disappointing picture of significant erosion of value, not just in absolute terms but also when contextualized within an environment where other opportunities were thriving.
Valuation
STGW's blended P/E ratio sits at 7.57x, and when juxtaposed against the normal P/E ratio of 12.34x (see chart below), it suggests that Stagwell is trading at a discount to its historical average valuation.
The adjusted (operating) earnings growth rate comes in at an impressive 12.01%. That said, the story isn't all roses and the fact that the stock price is so closely correlated with adjusted earnings suggests that any deviation from earnings expectations might result in volatility. So on one side, consistent earnings growth could further bolster the stock price; but on the flip side, any dip in earnings might be punished harshly by the market which appears to be the case as the stock is currently trading down almost -7% at the time of this analysis.
Risks & Headwinds
The headline figures themselves indicate a retreat. The quarter's reported revenue stood at $632 million , a 6% decline when compared to the same period in the previous year; even when we factor out pass-through costs, net revenue declined 3% year-over-year, settling at $539 million.
A deeper analysis reveals that in organic terms, the decline registered at 5%.
Looking at the U.S. market, we find traces that some investors might view as significant vulnerabilities. A decline in revenue in this region was precipitated by a medley of disruptive forces: interruptions in the tech sector, a strike by actors and writers that adversely affected Stagwell's media and entertainment clientele, and turmoil within regional banking. According to management, this downward trajectory was not isolated to a particular area but rather permeated all of the company's principal capabilities. The effect was particularly pronounced in the digital transformation sphere, where the company encountered delays and issues at the commencement of projects.
Regarding the ongoing Hollywood strikes, CEO Penn noted:
I think our assumptions are kind of modest relative to the writers' strike. We're not sure when the writers' strike is going to be over. We expect it to be over by next year and for it to end sometime this year, but I think that our -- our entertainment research company is trending very carefully, watching expenses until this -- until this strike is over. And I think in terms of tech, again, I think that we've built in modest assumptions of growing recovery on a slow basis. We've tried to be I think conservative in our outlook here figuring that the comeback will strengthen in fourth quarter, particularly as I think these companies see how much they really have to do to integrate generative AI.
In other words, CEO Penn's cautious approach to the writers' strike and slow tech recovery means the company is playing it safe, potentially affecting investment opportunities by focusing on careful spending and conservative growth expectations.
Lastly, Stagwell's actions in the first half of the year illustrate a deliberate effort to tighten the purse strings, resulting in fairly substantial savings. This strategy, however, also casts light on the more sluggish conditions the company has navigated during this period. A downward adjustment in revenue guidance, coupled with a planned reduction in net leverage over the medium term, stand out as pertinent details. While such moves may align with prudent management under the prevailing circumstances, they might also be interpreted by some investors as signs that the company is approaching its immediate prospects with caution.
Final Takeaway
Given the information provided, I would rate Stagwell's stock as a "hold." Despite international growth and a concerted effort to strengthen presence in various markets, the company's recent performance has shown significant erosion of value, with a glaring -6.87% annualized rate of return over the past five years. The reported revenue decline and potential vulnerabilities in the U.S. market further contribute to my cautious stance, and although trading at a discount to its historical average valuation might indicate opportunity, the overall picture appears mixed with elements of both promise and uncertainty.
For further details see:
Stagwell: Mixed Q2, 'A Step Forward And A Leap Back'