Is Omnicom Stock a Buy After Underperforming the S&P 500 by 65%?

Leading advertising company Omnicom Group Inc. (NYSE:OMC) is underperforming compared to the broader market. Over the past five years, the stock has gained only 32.6%, while the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) returned 91.1%.

On a shorter time horizon, Omnicom has underwhelmed too but perhaps now is the time to swoop in and buy the stock on the dip?

Omnicom Hindered by Headwinds In Advertising

Advertising has faced its fair share of challenges, such as regulatory measures. For instance, the General Data Protection Regulation (GDPR) in Europe that limit the scope of an advertising agency’s ability to store and use data. Google’s new ranking procedure is also currently affecting ad operations.

According to the Dentsu Global Ad Spend Forecasts report, international ad spending is expected to grow by 5% in 2024 to reach $754.4 billion, which is set to be spent by the end of the current year. This is a bit of an improvement compared to the 3.3% recorded in 2023. Moreover, the growth rate surpasses the pace of the global economy by 1.8%.

While print advertising is contracting, digital channels are still on an upward trajectory. Moreover, the U.S. presidential election had been forecast to generate a third, or about $11 billion, of the incremental global ad spending this year.

So, where does Omnicom fit into the big picture?

What Does Omnicom Group Do?

Specializing in digital marketing, Omnicom is one of the biggest advertising agencies in the world, offering its services to over 5,000 clients in over 70 countries.

It is essentially a holding company for its global networks BBDO, DDB, TBWA, Omnicom Media Group, the DAS Group of Companies, and the Communications Consultancy Network.

While the digital wave has successfully hit the advertising space, Omnicom’s digital transformation consulting and e-commerce marketing, as well as its market intelligence and data analytics services have largely been a hit with clients so what’s going on with the share price?

How is Omnicom Group Faring?

Last year was transformational for the company. First of all, Omnicom launched a newer version of its operating system called Omni 3.0. This is a next-generation operating system that is powered by generative AI. Marketing and advertising agencies nowadays deal with a lot of data, so generative AI is needed to optimize and make sense of it.

After this launch, the company added various first-mover generative AI collaborations with Adobe, Amazon, Getty, and Google to deliver better results for its customers.

Next, Omnicom acquired Flywheel Digital, the digital commerce business of Ascential, for approximately $835 million. Flywheel collaborates with big names like Amazon, Walmart, and Alibaba. The acquired firm has more than 100 marketplaces globally.

Flywheel is a purchase that investors should pay close attention to because it gives Omnicom the chance to evolve from an advertising and marketing-focused company to a marketing and sales-focused company that integrates a lot of end-to-end services.

Last year, Omnicom’s revenue increased by 2.8% from the prior year to $14.69 billion, with organic growth coming in at 4.1%. However, the company incurred some repositioning costs, which translated into some bottom-line margin contractions.

Non-GAAP operating income margin dipped from 15.4% in 2022 to 15.2% in 2023, while the non-GAAP EBITA margin slid from 15.9% to 15.7%.

As of last quarter, the company recorded a 5.2% organic growth in its top line, which led to growth in the bottom line on an adjusted basis.

On a reported basis, revenue grew by 6.8% from the prior year’s period to $3.85 billion but margins still contracted compared to the prior year’s period. The adjusted EBITA margin went from 15.5% to 15.3%.

Is Omnicom Stock a Buy?

The consensus price target of $116.85 among 12 analysts implies that Omnicom stock is a buy now with moderate upside potential.

Value investors need to be a little bit careful because the price-to-earnings ratio for Omnicom is just 14x, which seems cheap but it’s actually fairly high when earnings growth is factored into the equation. The 5-year net income growth forecast of 6.1% annualized is good but not stellar.

Offsetting the pessimism about valuation multiples is a 2.7% dividend yield that makes Omnicom quite attractive to income investors. That dividend has been in place for a full 54 years so it’s quite trustworthy and unlikely to change given that the payout ratio is just 38%.

Conservative traders will also find the lack of high volatility appealing but it can’t be overlooked that a discounted cash flow forecast model pegs fair value at $104 per share, and so the odds of a sharp uptick in share price seem low.

Sure, the ad space is set to continue its rebound from a dismal 2022, and the digital sub-sector is revealing relative strength so Omnicom is likely to benefit but slimmer margins and relatively muted growth mean it’s a stock to perhaps watch and wait for a bullish catalyst before jumping into with abandon.

For income investors however, the predictable yield and low volatility with modest growth may be sufficient to justify a portfolio allocation.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.