Omnicom Beats Estimates, Increases Dividend

Jul.20.10 | About: Omnicom Group (OMC)

Omnicom Group Inc. (NYSE:OMC) announced its results for the second quarter of fiscal 2010. During the quarter, net income grew 4.2% year over year to $243.3 million from $233.4 million in the second quarter of fiscal 2009. Earnings per share (EPS) also stretched by 4 cents from 75 cents in the year-ago quarter to 79 cents in the reported quarter. Reported EPS beat the Zacks Consensus Estimate of 77 cents.

Total revenue was $3,041.2 million, representing an increase of 5.9% year over year from $2,870.7 million in the first quarter of previous year. Domestic and International revenue rose 7.4% and 4.3% to reach $1,636.9 million and $1,404.3 million, respectively. The increase is attributable to the general business environment, which continues to stabilize and improve.

The company generated approximately 44.9% of revenue from Traditional Media Advertising, 35.7% from CRM, 9.6% from Public Relations, and the remaining 9.8% from Specialty Communications. Revenue by discipline grew in all categories: Advertising increased 4.6% year over year, CRM 5.9%, Public Relations 7.1%, and Specialty Communications 11.4%.

Geographically, 53.8% of total revenue was contributed by the U.S., 19.4% came from the European markets, 8.5% from U.K., and 18.3% from other locations.

Although, operating expenses increased 6.2% year over year, but as a percentage of revenues, it remained almost flat at 86.3% from 86.1% in the second quarter of fiscal 2009. Operating income grew 4.3% to $451.4 million, which resulted in an operating margin of about 13.7%, down 20 basis points compared with the last year.

Omnicom reported a decrease in net debt compared with the second quarter of fiscal 2009. At the end of the quarter, net debt was $1.7 billion, down from $2.0 billion at the end of the second quarter of fiscal 2009 based on debt repayment. As a result, total debt to EBITDA ratio improved to 1.3 times from 1.4 times and interest coverage ratio remained very strong at 12.9 compared with 14.2 in the year-ago period.

Omnicom increased its quarterly dividend by 33% from $0.15 to $0.20 per share during the quarter.

Omnicom has improved coordination between the diverse advertising and marketing strategies of its global customers, which should augment cross-selling opportunities across the company’s businesses.

Despite the current challenging economic environment, Omnicom continues to generate new business wins and has acquired complementary companies to expand its client base. In reaction to the current economic challenges, management has aligned the company’s cost structure by right-sizing headcount and reducing compensation pools, which will show long-term results.

However, an intensely competitive advertising environment and pricing pressures continue to negatively impact the operating margins. Thus, our long-term recommendation for the stock remains Neutral in line with the Zacks #3 Rank, which implies a short-term recommendation of Hold.