The second-worst performing S&P 500 stock in July was the Interpublic Group of Companies (NYSE:IPG), which was down 26.4%. August hasn't been much better, down another 20% just two-thirds into the month. In fact, it hasn't been a good decade for the owner of McCann-Erickson, Draftfcb and other global advertising agencies. Its annual return between 2001 and 2010 is negative 11.15%, 12.7 percentage points worse than the index. Interpublic's recent sale of half its shares in Facebook for $133 million (acquired for $2.5 million) demonstrates management are capable of making good decisions and better times will come for this severely wounded stock. (To help you determine if this company is a good investment for your portfolio, read How To Analyze A Company's Financial Position.)
TUTORIAL: Earnings Quality
Forget options and grants. I want to see insiders buying stock on the open market. That's a sure sign of confidence. I'm looking for a "P" on the form 4. Director John Greeniaus made two such buys in early August, acquiring 11,200 shares at an average cost of $9.08. The additional shares bring his total to 206,147 and a market value of $1.6 million. Greeniaus' $100,000 investment might not seem like a lot but it's more than you see from the average director sitting on a board. Putting his money where his mouth is, Greeniaus has in effect said he believes the stock is worth more than $9.08 a share. This is as good an indication as any that it's now trading at a bottom.
Stronger Than Ever
Its second quarter numbers were good. Revenues grew 8% to $1.74 billion and while operating income was flat year-over-year at $174 million, I'll take the 10% operating margin despite the fact that it was 100 basis points lower than in 2010. It's still higher than in years past. As for diluted earnings per share, they increased 26.7% to 19 cents. For the first six months of the year, it experienced 6.8% organic growth with every geographic region making a positive contribution to the top-line. While I'm not a fan of share repurchases, it did buyback 12 million of its shares between March and June at an average cost of $11.61 a share. This act of faith combined with the actions of John Greeniaus tells me that any temporary decline its stock is experiencing is exactly that - temporary. (For more, check out 12 Things You Need To Know About Financial Statements.)
Interpublic Group and Peers
|Interpublic Group of Companies (NYSE:IPG)||5.9|
|Omnicom Group (NYSE:OMC)||6.4|
|WPP PLC (Nasdaq:WPPGY)||4.0|
|Publicis Groupe (OTCBB:PUBGY)||6.2|
|Focus Media Holding (Nasdaq:FMCN)||16.7|
In its Q2 results announcement, CEO Michael Roth indicated that its operating margin for the entire 2011 would be 9.5%, its highest margin in the past 10 years. Despite losing the SC Johnson account, it could generate revenues in excess of $7 billion for only the second time in its history. The loss of SC Johnson will not have a material effect on the company despite being a billion-dollar account. This type of thing happens all the time in the ad world. You win some and you lose some. It'll be fine. The smokescreen aside, it's trading well below its intrinsic value. How do I know this? Well, I don't but if you compare its financial situation of today with April 2002 when it hit a 10-year high of $34.98, you can't help but wonder which scenario is more accurate. Usually in these situations, the truth lies somewhere in the middle. In the second quarter of 2002, Interpublic's operating income was $238.5 million on $1.6 billion in revenue for an operating margin of 14.9%, 490 basis points better than in 2011. Put another way, its operating margin today is 33% lower. If I apply this discount to its high of $34.98, I get a value of $23.43, which is, not coincidentally, almost halfway between the high in 2002 and its August 18 price of $7.85.
The Bottom Line
It's hard to know how much Interpublic's remaining shares in Facebook are worth, but the Wall Street Journal believes the social media site will go public in 2012 at an IPO value of $100 billion. If so, that puts Interpublic's remaining 0.02% interest at $200 million. Its $5 million investment back in 2006 will have generated an annual return of 101%. Michael Roth was CEO then and he is today. I don't know about you, but that's the kind of decision-maker I want running the companies I invest in. At these prices, it's a no-brainer.
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