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Tickers in this Article: MDCA, OMC, IPG, WPPGY, BRK-A, BRK-B
If you examine the selected financial results for MDC Partners (Nasdaq:MDCA) in its most recent 10-K, you'll notice its revenues grew from $198 million in 2003 to $547 million in 2007. Fantastic results, you'd surmise. Unfortunately, if you read further, you'll see that its income from continuing operations went from $28 million in 2003 to a loss of $19 million in 2007. No wonder its stock is down to $4 from a high of more than $15 in early 2004. Hardly worth the time of day, let alone investment consideration.

So, why am I writing about this flea-bitten nag? Read on. I think you'll figure it out.

Pictures Can Be Deceiving
The scenario above contains one slight illusion - the losses are misleading. Included in the loss is $20.6 million in minority interests, the earnings of its minority partners. This blurs its overall performance because it doesn't treat the earnings in their entirety.

A more reliable figure in this instance is operating profit, which was $23 million, slightly less than in 2006 when it made $23.8 million (albeit with $135 million less in revenues). The point is that MDC's profit picture will continue to be fuzzy until it changes its business model and buys out its minority partners. That's not likely to happen, because keeping minority owners around is a good way to keep them motivated and in the game. (For more about seeing income beyond the number, see Earnings: Quality Means Everything.)

An Unknown Quantity
Miles Nadal, CEO, has been starting and running companies since age 22. Well-known in Toronto (where I live) for both his entrepreneurship and philanthropy, he founded his first company in 1980 and has built MDC Partners into the ninth-largest marketing communications firm in the world. That's impressive for someone who started out in business with $500 and a dream.

MDC is a holding company providing human, financial and intellectual capital to its entrepreneurial partners. Generally, it buys majority control of a firm, leaving the original partners in operational command and retaining enough equity to remain motivated. Its three divisions are Strategic Marketing Services, Customer Relationship Management and Specialized Communication Services.

Partners include well-known advertising/marketing firms Zyman Group and Crispin Porter + Bogusky, of which MDC owns 62% and 77%, respectively. Competing with much larger competitors Omnicom (NYSE:OMC), Interpublic Group (NYSE:IPG) and WPP Group (Nasdaq:WPPGY), MDC has just 26 people working in the head office, deploying capital and support where needed to make its businesses run better - just like Berkshire Hathaway (NYSE:BRK.A,BRK.B).

Mixed Results
While revenues continue to grow, operating profits can't seem to break through. The last three years have all been in the $22 million to $24 million range, meaning operating margins are dropping, from 6.4% in 2005 to 4.2% in 2007. Management understands this, focusing its efforts on developing a sustainable and profitable business. In 2007 its organic growth was 23.4%, an indication that acquisitions aren't essential to its success. (Read more about how not all growth is equal at Is Growth Always A Good Thing?)

Positive results have carried through into 2008. MDC's third-quarter numbers were announced only days ago and were very encouraging. Highlights include organic revenue growth of 3.6% year-over-year, new business wins of $24.5 million and an EBITDA of $15.4 million, up 65.6% from the year before. In a telling sign, its operating margin was 5.1% in Q3, up 300 basis points from last year. While not perfect, it is a big step in the right direction. These seeds of encouragement have led BMO Capital Markets, Jefferies & Co. and Wachovia analysts to rate it a buy or outperform in the last five months alone.

More Mixed Results
Positives include a price-to-book ratio of 0.86, a price-to-sales ratio of 0.18, an enterprise value 4.4-times EBITDA and 65 cents in cash per share. Negatives include a stock down 61% in the past 52 weeks, total debt that is 136% of equity and a current ratio of less than one. Investors who believe in a margin of safety usually prefer the current ratio to be two or higher. As for an operating margin of 4.3% in the last 12 months, it's pretty meager. This stock isn't a slam dunk.

Bottom Line
In its Q3 press release, MDC affirmed full-year guidance of revenues between $600 million and $610 million, its portion of EBITDA $61 million to $64 million and free cash flow between $30 million and $35 million. At the $4 mark, if you have a long-term hold in mind, MDC is anything but flea-bitten. Sometimes it pays to look beyond the obvious.

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