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The Interpublic Group of Companies, Inc. (NYSE:IPG) recently delivered better than expected EPS GAAP, and continues to report stock repurchase programs to enhance the value of the stock. After delivering positive free cash flow for over ten years thanks to successful acquisitions, I would expect further growth thanks to new data management capabilities and investments in technology. Different valuation models including reviewing precedent transactions and a discounted cash flow model with conservative assumptions indicated a fair price between $56 and $43 per share. In any case, today, I think that the company trades undervalued at close to 10x Non-GAAP TTM earnings.
IPG
IPG offers marketing, communications, and business transformation services to help clients sell more in the current digital economy. According to the last annual report, IPG is the successor to the advertising agency founded in 1902 by A.W. Erickson. IPG started using the Interpublic name in 1961. Taking the company's history into account, in my view, IPG has accumulated a significant amount of know-how. It may be difficult for new entrants in the industry to compete with the business connections and brand name accumulated by IPG for so many years.
In the last quarterly report, the company reported better than expected EPS GAAP of $0.57 and quarterly revenue of $2.33 billion. The EPS expectations about 2024 include a small decline in EPS of close to -5%; however, the analysts are expecting EPS growth in 2025. In any case, the company reported a significant amount of growth in the last ten years. I think that IPG could be trading at more than 8x TTM EBITDA.
Cash Flow Producer, Business Growth, And Repurchase Of Shares
I reviewed the financial figures of the last ten years to understand whether the company grows or not. First, I noticed that from 2014 to 2024, the total amount of cash increased from about $1.6 billion to more than $1.9 billion. Even if IPG uses some debt, IPG's operations seem to bring some cash.
Source: Seeking Alpha
In addition, the company did report an increase in the total number of assets, and the total amount of equity also increased from $2 billion to around $3.8 billion. In my view, directors are expecting business growth. They would not build assets if they were not expecting their business to grow.
Source: Seeking Alpha
It is also worth noting that the company acquired several businesses in the past, as goodwill increased from $3.6 billion in 2014 to $5 billion in 2024. I did also appreciate that the company did not report goodwill impairments, as goodwill did not seem to decline significantly in the past. In my opinion, IPG knows well how to buy at the most appropriate price.
Source: Seeking Alpha
The book value per share also increased from $5 per share in 2014 to about $10 per share in 2024. In my opinion, a further increase in the book value could bring stock price increases.
Source: Seeking Alpha
In my view, IPG's directors also believe that the stock appears undervalued at its current price. The share count decreased from 413 million in 2014 to 375 million in 2024. I think that a further decrease in the share count could lead to increases in the fair price. As a result, I would expect stock price increases.
Source: Seeking Alpha
Net Income Growth, And Some Net Debt
A quick review of the income statement shows long-term net income growth from $477 million in 2014 to $1.08 billion in 2024. Given the long-term growth, I expect similar growth rate in the coming years. The company also reported an increase in the total amount of debt; however, it does not seem to be worrying. Net debt is approximately close to 2.4x net income.
Source: Seeking Alpha
Another key indicator of long-term growth and beneficial business prospects is, in my view, the headcount growth. From 2014 to 2024, total employees increased from approximately 47k to 56k. I think a further increase in the total number of employees could lead to net sales growth and net income growth.
FCF And Capex Review
FCF remained positive from 2014 to 2024. FCF figures grew from $584 million in 2014 to $1.7 billion in 2021, and declined to $890 million in 2024. With that, FCF was larger in 2024 than that in 2014, so I would say that the business model is becoming more profitable. It is also quite remarkable that IPG reported FCF growth, and at the same time reported capital expenditures increases, from $148 million in 2014 to $169 million in 2024. Net property, plant & equipment increased from $548 in 2014 to $1.7 billion in 2024. In my opinion, the company is investing in new capacity, which may bring increases in free cash flow.
Source: Seeking Alpha
DCF Model: $56 Per Share
My discounted cash flow model includes assumptions about future growth via a continuous and successful acquisition strategy, which may enhance the company's service offerings. With new products from acquisitions, IPG could offer them to existing customers, which may be a fantastic revenue driver. Besides, with new acquisitions, the number of customers and presence in new markets will most likely increase. In the last annual report, the company provided the following details about recent M&A operations.
In recent years, IPG has acquired agencies across the marketing spectrum, including firms specializing in data and tech, e-commerce, mobile marketing, social media, healthcare communications and public relations, as well as agencies with full-service capabilities. These acquired agencies have been integrated into one of our global networks or specialist agencies. IPG continued to further evolve our offerings, investing in new capabilities and innovation to help our clients succeed in today's digital economy. Source: Annual Report
I would also expect significant business growth thanks to the company's data management capabilities, which improved considerably after the acquisition of Acxiom. In combination with long-term investments in technology, I think that data management could bring significant understanding of new audiences and markets. I believe that it is worth having a look at the following lines.
IPG has incorporated data expertise into the core of the Company, as reflected most clearly in our acquisition in 2018 and subsequent integration of Acxiom, a leading enterprise data management company. Understanding data and its power is critical to the current and future success of our Company and our clients. We believe an ethical and conscious approach to data that respects consumer privacy will continue to be crucial as we navigate increased regulation in the digital media space. Source: Annual Report
In the last quarterly report, the company made remarks about the most recent acquisition of shares in 2024. In my discounted cash flow model, I assumed that further repurchase of shares could bring new demand for the stock, which may lower the cost of equity and the cost of capital.
On February 8, 2023, the Board of Directors (the "Board") authorized a share repurchase program to repurchase from time to time up to $350.0, excluding fees, of our common stock, which was in addition to any amounts remaining under the 2022 share repurchase program. On February 7, 2024, the Board authorized a share repurchase program to repurchase from time to time up to $320.0, excluding fees, of our common stock, which was in addition to any amounts remaining under the 2023 share repurchase program. Source: Quarterly Report
Under my discounted cash flow model, I assumed that international revenue could bring significant net sales growth. With know-how from the United States, I expect the business model to be successful in the U.K., Europe, Asia Pacific, Latin America, and other regions where the company is already present. In the quarter ended June 30, 2024, the company reported total sales of $2.7 billion with $1.7 billion in the United States, $237 million in the United Kingdom, and $229 million in Europe.
With a WACC of 7%, and long-term growth of 3%, I obtained a total equity valuation of $21 billion, and a fair price of $56 per share.
Source: Seeking Alpha
- NPV (WACC=7%): $4,742.65 million
- NPV of TV (WACC=7%, 3% Growth): $19,310.59 million
- Total Value: $24,053.24 million
- Net Debt: $2,786.1 million
- Equity: $21,266 million
- Shares: 375 million
- Target Price: $56
Precedent Transactions: $43 Per Share
Based on a selection of transactions, my professional judgment and experience, I selected a reference enterprise value to estimated LTM Adjusted EBITDA multiples of 11x. EBITDA increased from $951 million in 2014 to $1.7 billion in 2024. Hence, at 11x EBITDA, the total enterprise value would be $19.09 billion. If we subtract net debt of $2.7 billion, the implied valuation would be close to $43 per share. Given the current stock price, I would say that there is upside potential in the stock price.
Source: Seeking Alpha
Risks
Given the total amount of goodwill and the number of businesses acquired, in my view, future M&A operations could bring some risks. Goodwill impairments may lower future book value per share, and synergies expected may not be realized. Besides, analysts and other market participants could conclude that IPG does not buy other targets at beneficial valuations. In sum, future M&A transactions may not bring stock price increases.
IPG did hire a significant number of employees in the last ten years, which may have a beneficial impact on future net income growth. However, in my view, changes in the labour markets, inflation, or an increase in salaries could lower future FCF growth, net income generation, and net sales growth. In the worst-case scenario, other analysts and seeking alpha analysts may lower their expectations about the future, which could lower the demand for the stock.
In my opinion, the total amount of debt does not seem significant, however changes in the interest rates or large net debt increases may accelerate interest expenses. In addition, the net debt/EBITDA ratio could increase, which may make the stock a bit less appealing for investors. If a number of shareholders sell their equity stakes, we may see decreases in the stock price.
My assumptions with respect to the future FCF may be too optimistic. The cost of capital or the long-term growth assumed could also be far from reality. In that case scenario, the implied valuation that results from my discounted cash flow model could be lowered. With regard to the companies and transactions selected in my precedent transactions section, IPG may also be different from the companies reviewed. The EV/EBITDA multiple used could be too optimistic.
Conclusion
For the last ten years, IPG proved that it knows well how to acquire targets, grow assets, and deliver positive free cash flow. The company has also operated for many years, which, I think, did bring a lot of know-how about the advertising industry, which may help the company grow. In combination with the recent acquisition strategy, investments in technology, and developments in the data management area, IPG will most likely grow from now to 2029. The review of transactions in the industry implied a valuation of $43 per share. In addition, my discounted cash flow model indicated a valuation of close to $56. In any case, I think that the company appears quite undervalued at the current price.
