Omnicom Group Inc. (NYSE: OMC). Prior to the pandemic, Omnicom was seeing signs of improvement in North America, which accounts for roughly 55% of revenue. However, the coronavirus has weighed on Omnicom as clients have cut back on marketing and advertising spending, especially in such areas as events and field marketing. In response, the company has cut headcount by 6,100, suspended new hiring, and cut nonessential spending. It has also received government subsidies, extended its credit facilities and debt maturities, and suspended share repurchases. These actions, which are expected to generate $500 million in cost savings, will help offset the impact of lower revenue. Though the near term remains uncertain, we look for revenue stabilization in 2021.
We remain bullish on Omnicom over the long term based on its leading industry position and our high regard for management, which has a history of topping Street expectations and achieving high returns on invested capital. The company has also boosted overall revenue through acquisitions, and has been divesting lower-margin noncore and underperforming businesses and consolidating real estate.
On October 27, Omnicom reported 3Q20 non-GAAP earnings of $1.21 per share. Though all segments improved from the second quarter, healthcare is the only business segment to post higher revenues this year, with growth of 4.2% in 3Q and 5.2% year-to-date. Omnicom’s two largest client industry sectors, health and tech & pharma, grew third-quarter revenues by 4.6% and 17.8%, respectively. Still, the third-quarter operating margin expanded to 15.6% from 13.1% a year earlier, reflecting reduced spending, temporary pay cuts, and the impact of tax credits and government programs. Excluding those benefits, the operating margin rose 40 basis points to 13.5%.
Management does not provide EPS guidance, and previously withdrew its full-year outlook, which called for flat margins and organic growth of 2%-3%. Management expects further revenue declines in 4Q. It previously suspended share repurchases, but has no plans to cut the dividend. It expects continued challenges this year in the travel, events and entertainment businesses, but improvements in retail, media buying, and food and beverage.
In 1Q19, Omnicom sold its Marketstar business, and in August 2018, it completed the sale of Sellbytel Group, a noncore business, to Webhelp Group. It also sold 18 other noncore businesses in 3Q18, primarily in CRM Execution & Support. Approximately 7,000 jobs were cut; however, management said that it would fill 500 positions in ongoing operations. In 3Q18, Omnicom also acquired two businesses: management and IT consulting firm Credera, which focuses on platforms that drive sales through consumer engagement; and United Digital Group, a marketing firm. Management continues to pursue acquisitions in the areas of data analytics, digital transformation, and precision marketing.
EARNINGS & GROWTH ANALYSIS
Omnicom has benefited from its focus on improved efficiency, stronger IT capabilities, new initiatives in specialty healthcare, and strategic acquisitions.
In 4Q17, Omnicom reorganized its CRM business into two segments. It also renamed Specialty Communications as the Healthcare segment, which includes both Healthcare Marketing and Communication Services.
The core advertising business, representing 55.9% of 3Q revenue, posted an 11.7%. The healthcare business (9.3% of revenue) saw a 3.8% increase, as client spending continued despite event cuts. CRM Consumer Experience, which accounts for 16.1% of revenue, saw organic revenue fall 19.3% on declines in its events and media businesses; Public Relations (10.1% of revenue) decreased 3.4% declined 19.4%, primarily due to declines in the field marketing and nonprofit consulting businesses.
Driven by weakness in events, advertising, media, partially offset by growth in the healthcare businesses. Organic revenue was down 12.5% in the UK, with strength in precision marketing and healthcare more than offset by declines in other businesses. In Asia Pacific, organic revenue fell 12.8%, with single-digit declines in greater China and Australia. Organic revenue declined 9.6% in Europe (ex UK).
FINANCIAL STRENGTH & DIVIDEND
To strengthen liquidity, Omnicom has extended its $2.5 billion credit facility to February 2025; redeemed its $600 million 4.45% senior notes, and issued $600 million in 10-year, 2.45% senior notes. In April, it also issued an additional $600 million in 10-year, 4.20% senior notes, and entered into an additional $400 million revolving credit facility that also expires in February 2025. The company has no debt maturing until May 2022.
The company has repurchased stock since May 2014 and views buybacks as an important use of free cash flow. It repurchased a total of $603.7 million in 2019 and $200 million in 1Q20. However, it has suspended share repurchases until conditions stabilize, and does not expect to resume them this year.
MANAGEMENT & RISKS
The CEO of Omnicom Group is John D. Wren. He became CEO in January 1997, and has been with the firm for 30 years. Phil Angelastro is the CFO. The company has made a number of changes to its board, and is working to improve governance and communications with shareholders. Lead director Len Coleman has taken on additional responsibilities for shareholder communications, and Debbie Kissire, a former vice chairman of Ernst & Young, has joined the board and become a member of the audit committee.
Investors in Omnicom face specific risks. Investors in Omnicom face specific risks. Given low capital requirements, the advertising industry has low barriers to entry. OMC and its two major global rivals (WPP Group and Interpublic Group), as well as countless regional and local agencies, are all fighting for market share.
It serves more than 5,000 clients in over 100 countries, and almost half of revenues come from overseas operations. Agency brands include BBDO Worldwide, DDB Worldwide, TBWA Worldwide, Agency.com, and FleishmanHillard, among others. The company has focused on providing marketing services, such as public relations and customer relationship management (branding consultation and event and sports marketing, for example), in addition to traditional advertising services.
Based on the company’s current challenges, our near-term rating remains HOLD. However, we remain bullish on Omnicom over the long term based on its leading industry position and our high regard for management, which has a history of topping Street expectations and achieving high returns on invested capital.