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Omnicom: Advertising pays

This advertising and marketing conglomerate is well-positioned for superior earnings growth.

By Michael Sivy, Money Magazine editor-at-large

NEW YORK (Money) -- Nothing happens in business until somebody sells something. And most of the time, that requires a lot of advertising.

Because of the rapid expansion of the Internet and other new media, advertising growth has been subpar at many traditional outlets, such as newspapers and magazines. But if all media are considered together, advertising continues to outpace the economy.

Industry forecasters project that overall, advertising will grow by 4 percent to 5 percent this year and continue at an above-average rate.

The great beneficiaries of this trend are ad agencies that are broadly diversified and also have the capability to keep up with the latest developments in marketing.

A prime example is Omnicom, which was formed in 1986 through the merger of three leading U.S. advertising agencies - BBDO, Doyle Dane Bernbach and Needham Harper Worldwide.

Today, Omnicom is a globally diversified advertising and marketing conglomerate, with total revenues of more than $11 billion a year.

Traditional advertising generates 43 percent of business. The rest comes from marketing and corporate communications.

The U.S. accounts for 54 percent of revenues, and foreign business brings in 46 percent.

Worldwide, Omnicom serves more than 5,000 clients in a broad variety of industries.

Business has been excellent for the conglomerate. Over the past 12 months, the share price has risen more than 25 percent. In fact, the stock is within a couple of dollars of its 52-week high.

Earnings for the fourth quarter were right on track. A few analysts were disappointed that the results did not exceed projections. But most continue to be impressed by Omnicom's steady growth.

For the quarter, net income was up by 9.7 percent on a 9.4 percent gain in sales.

Earnings per share, however, were up a more impressive 14.9 percent, chiefly because Omnicom (Charts) continues to use its ample cash flow to repurchase stock. Over the past year, the company has spent more than a billion dollars on such buybacks.

For the full year, earnings per share were up 14.4 percent. Analysts expect a gain of more than 13 percent this year and an average of at least 12 percent annually over the next five years.

Much of Omnicom's growth is expected to come from general economic expansion. The company has also been a steady acquirer - particularly of smaller companies that specialize in advertising and marketing niches. Over the past 20 years, the conglomerate has made more than 1,500 such strategic acquisitions.

The immediate outlook is bright as well. Advertising firms typically enjoy strong business in the 18 months leading up to a Presidential election.

Given solid growth potential and a 1 percent yield, Omnicom looks fairly priced at $104.82. The stock trades at 18.6 times this year's estimated earnings and 16.5 times next year's projections.

Those multiples aren't too far above the broad market, and Omnicom is a stock that certainly deserves a premium.


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