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Omnicom Remains Focused on Core Businesses Despite Risks

Zacks

On Oct 6, we issued an updated research report on global marketing and corporate communications firm, Omnicom Group Inc. OMC.

Growth Drivers

Omnicom’s performance in developed markets like the United States and developing markets like Asia has been steady. The measures undertaken by the company to reduce costs have helped it boost earnings. It is expanding its global footprint and is moving into new service areas. The company is also building upon its digital and analytical capabilities by investing in agencies and partnering with innovative technology companies in key markets. Omnicom’s operations are diversified across technology platforms, thus lowering its dependence on any one product in these dynamic technological markets.

Also, Omnicom is concentrating on strengthening its business and expanding its client base globally through the acquisition of complementary companies. The company maintains a balanced growth model through a combination of well-focused internal development initiatives and strategic acquisitions. We expect it to witness higher revenues in the imminent future on the back of prudent acquisitions and organic growth.

The company has outperformed the industry with an average year-to-date loss of 10.2% compared with a decline of 14.3% for the latter. In order to spur growth, Omnicom started using open-source technique to access the current information in the market. The increasing demand for media services, speedy growth of technologies and massive proliferation of channels are likely to translate into incremental revenues in the future.



Headwinds

Omnicom forms part of the communications industry, which is highly competitive in nature. Various agencies and media service providers compete with each other to maintain existing client relationships and to win new clients. Also, keeping in view the service-oriented nature of the industry, it becomes imperative for the company to increase the count of talented employees and retain the existing ones. These factors are likely to pose some challenges for it.

Furthermore, a significant portion of Omnicom’s revenues comes from Europe. At present, when the economy in the region is highly unpredictable, particularly after the Brexit referendum, it becomes difficult for the company to increase revenues and reduce costs. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering the productivity of the company. In addition, it is susceptible to market risks of losing contracts related to media purchases and production costs, which thereby affects its bottom line and undermines its organic growth to some extent.

Moving Forward

Nevertheless, we remain impressed with Omnicom’s focused growth initiatives and expect it to witness higher revenues in the future.

Omnicom currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader industry include Accenture plc ACN and PageGroup plc MPGPF, both carrying a Zacks Rank #2 (Buy), and Stantec Inc. STN sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Accenture has a long-term earnings growth expectation of 10.3%. It topped earnings estimates in each of the trailing four quarters with an average positive surprise of 2.6%.

PageGroup has a long-term earnings growth expectation of 15%. It topped estimates twice in the trailing four quarters with an average positive earnings surprise of 1.1%.

Stantec is currently trading at a forward P/E of 18.1x.

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