Interpublic reported organic revenue growth of 2.3% in the first quarter, about on par with our expectations and a sequential improvement from 0.4% in the fourth quarter. The company is now at the tail end of lapping key client losses, mainly in the United States, so we view U.S. organic growth of 0.5% as a step in the right direction. We are maintaining our $14 fair value estimate and narrow economic moat rating. Still, Interpublic is battling in a tough macroeconomic environment, especially in Europe, so we expect 2%-3% growth in 2013. We view the shares as slightly undervalued, as Interpublic and peers Omnicom OMC and WPP Group WPPGY have all had nice stock price appreciation over the past six months.
The firm generated 0.5% organic sales growth in the U.S., a sequential improvement from a 1% decline in the fourth quarter. Analysts believe this growth rate will improve when the company finishes lapping client losses in the third quarter and starts to see the benefit of new client wins. For reference, larger peer Omnicom reported organic sales growth of 4.1% in the U.S. Thursday. International organic revenue was 4.9% higher, with Latin America offsetting continued weakness in continental Europe.
Interpublic’s trailing-12-month operating margin of 9.7% was down from 9.8% in the prior two quarters. However, we expect about 40 basis points of margin improvement in 2013, with most of the gains occurring in the second half of the year. Management’s main long-term goal is to push longterm profitability to industry-competitive levels, which implies at least 12%. Our long-term forecast has always assumed the company falls short of this goal but shows some improvement toward 11.5% over the next five years.
Analysts were encouraged to see the company increase the stock-buyback authorization by $200 million during the first quarter. Management has done an outstanding job of remaining disciplined with acquisitions, which has allowed Interpublic to improve its balance sheet and return capital to shareholders through repurchases and dividends. In the big picture, the ad agency stocks are cyclical, so perhaps ironically, the most opportune time to invest occurs when the advertising market is weak or decelerating as the market projects poor recent results too far into the future.
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