* All data are as of the close of Friday, November 7, 2014.
* Emphasis is on company fundamentals and financial data rather than commentary.
You might find them annoying, tiresome, bothersome, some times gruesome, and at other times distasteful. Or, pleasant, soothing, informative, entertaining, exciting, even provocative. What they will never be, however, is unobtrusive or cheap.
No, I'm not talking about an intoxicated friend at a social gathering, although they would fit the afore-listed adjectives. I'm talking about ads: be they television commercials, web-browser banners and pop-ups, billboards, bus stop posters, even elevator and public washroom screens. They even put them on your grocery store receipts!
Yet advertising is more than simply drawing the consumer's attention to a product or service. It is a means of shaping, even crafting, an image that consumers will feel attached to. After all, companies don't simply want customers, they want loyal followers who will come back to them again and again for a lifetime.
Hence, the service advertising companies provide is utterly indispensable to corporations, as they not only find ways of marrying consumers to products and companies, but also find ways of making the union seem like a match made in heaven, valuable enough to want to fork over money for.
But what about the advertising agencies themselves? Are they valuable enough for investors to want to fork over money for? According to the graph below, the three largest U.S. companies in the space certainly seem to be.
Since the economic recovery began in early 2009, where the broader market S&P 500 index [black] has gained 200% and the SPDR Consumer Discretionary ETF (NYSE: XLY) [blue], which the advertising industry belongs to, has gained 320%, the three largest U.S. advertising agencies - Omnicom Group Inc. (NYSE: OMC) [beige], The Interpublic Group of Companies, Inc. (NYSE: IPG) [purple], and Lamar Advertising Co. (NASDAQ: LAMR) [orange] - have risen 230%, 415% and 850%, respectively.
On an annualized basis, where the S&P 500 index has averaged 35.29% and the discretionary fund XLY has averaged 56.47%, Omnicom has averaged 40.59%, Interpublic has averaged 73.24%, while Lamar has averaged 150% per year!
As the economy continues to recover, companies will have even more profit to allocate to advertising campaigns. Hence, advertisers are one way for investors to benefit from an expanding economy.
By the look of the advertising agencies industry's projected earnings growth, the benefits to investors are set to continue strong for years to come, as tabled below where green indicates outperformance, while yellow denotes underperformance.
From the next quarter through 2015 in particular, the industry's earnings growth is projected to more than double that of the broader market's average earnings growth rate, before settling down to outgrowing the market by some 60% more.
Zooming-in a little closer, the three largest U.S. companies in the industry are expected to put in a split performance, with the largest Omnicom underperforming, second largest Interpublic swinging from under-, to out-, and back to underperform again, while third largest Lamar outperforms all over the near term and 2015, before hitting a rough patch beyond.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green, while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Interpublic posted the greatest revenue growth year-over-year, while Lamar posted the greatest earnings growth. At the low growth end of the scale, Lamar and Omnicom split the last spots between them.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Omnicom operated with the widest profit margins, while Lamar enjoyed the widest operating margins. At the narrow end of the spectrum, Lamar and Interpublic contented with the narrowest margins.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
In returns on assets and equity, Omnicom's management team delivered the greatest returns in both, while Interpublic's and Lamar's teams split the last place finishes between them.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Omnicom provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Lamar's DEPS over stock price is the lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Omnicom's stock is the cheapest relative to forward earnings and 5-year PEG, while Interpublic's stock is cheapest relative to company book value. At the overpriced end of the scale, Lamar's stock takes the spot relative to earnings and PEG, where Omnicom takes it relative to book.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Interpublic offers the highest current quarter earnings percentage over its current stock price, while Omnicom offers the highest percentages for next quarter and 2015 earnings. At the low end of the scale, Lamar offers the lowest earnings percentages over current stock price most of the way.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Lamar is projected to deliver the greatest growth from the current quarter through 2015, while Interpublic is expected to deliver it over the next 5 years. At the other end, Omnicom is expected to deliver the slowest earnings growth overall.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Interpublic's stock has the greatest upside potential and least downside risk, where Omnicom's stock is believed to have least upside potential, while Lamar's is seen having the greatest downside risk.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Interpublic is best recommended with 5 strong buys and 8 buys, representing a combined 65% of its 20 analysts, followed by Lamar with 3 strong buy and 2 buy recommendations representing 45.45% of its 11 analysts, and lastly by Omnicom with 1 strong buy and 5 buy ratings representing 31.58% of its 19 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Interpublic by a narrow banner, outperforming in 10 metrics and underperforming in 6 for a net score of +4, followed close behind by Omnicom, outperforming in 11 metrics and underperforming in 8 for a net score of +3, with Lamar all ripped up at the back of the bus, outperforming in 10 metrics and underperforming in 17 for a net score of -7.
Where the advertising agencies industry is expected to outperform the S&P broader market substantially next quarter, significantly in 2015, and meaningfully beyond, the three largest U.S. companies in the space are expected to put in a split performance near term, with Omnicom underperforming, Lamar outperforming, and Interpublic swinging back and forth in the wind.
Yet after taking all company fundamentals into account, Interpublic shines the brightest given its lowest stock price-to-book, highest cash over market cap, highest revenue over market cap, highest trailing revenue growth, highest current expected earnings over current stock price, highest future earnings growth over the next 5 years, highest price targets, and most analyst buy recommendations - narrowly winning the advertising agencies industry competition.