Omnicom Adapts To Changing Environment (OMC)

By Douglas McIntyre | May 17, 2007 AAA
In the Barron's list of the 500 largest public companies rated by sales growth and cash flow return, ad-agency holding company Omnicom (NYSE: OMC) rose from No. 253 in 2006 to No. 90 in the new survey. The jump was a big one, and the company's financial performance has not been bad, but the firm's share price has gone nowhere.

Industry with Problems

Advertising agency stocks have all done poorly over the last year. Interpublic (NYSE: IPG) has finally started to rebound from accounting problems, but its net has been poor. Of the four largest public companies in the industry, its shares have done the best, up a bit over 20% over the last year. WPP (Nasdaq: WPPGY) and Publicis (NYSE: PUB) have risen between 10% and 20%. Omnicom trails with an increase of 10% in its share price.

Wall Street's assumption about these stocks is that they have gone from placing almost all of the advertising in national media ten years ago, to now competing with software ad-auction platforms like Google (NYSE: GOOG) and 24/7 Real Media (Nasdaq: TFSM). Two decades ago, most advertising agencies kept 15% of the value of the media they placed. This has gone down as smaller media-buying services came into the business.

These smaller media-buying services didn't create advertising, but they placed it for a very low fee, and margins at big agency companies were hit. In the last five years, as advertising has migrated online, systems like Google's Adsense platform often involve no ad-agency intermediary at all. Clients buy the inventory directly and manage it online.

Internet Companies Chase Core Ad Agency Business.

Google and Yahoo! (Nasdaq: YHOO) are beginning to work with newspaper and radio networks. Their systems allow national advertisers to target key demographics using software that finds appropriate media and runs an auction system to place the ads at the lowest available rate. While advertising agencies may still create the content of the marketing message, their roll in picking media is eroding. But, Omnicom has combated this by adding public relations and client brand management to its business and delivering a suite of products to its customers. The online auction system cannot match this as a range of services.

Omnicom Stays above Water

In the last quarter, Omnicom's business grew a bit over 7% organically, factoring out acquisitions as total revenue hit $2.8 billion for Q1 2007. Net income rose 10% to $183 million, but net margins are now only about 6%. Looking at segments, advertising grew the most slowly, with public relations revenue and client relations sales as the faster growing businesses.

Even in the face of growing competition, Omnicom has been able to make progress, albeit slow progress. It is doing better than rivals like Interpublic which lost $126 million on revenue of $1.34 billion.

The question now is whether investors will ever view ad agencies as growth stocks again. If not, ad agencies may simply end up as modest performers in an increasingly competitive landscape.

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