To The Moon

$Omnicom(OMC)$

Omnicom Group Inc. (NYSE: OMC) provides advertising, marketing, and corporate communications services in a rapidly evolving industry shaped by technological advancements, shifting consumer behavior, and changing client demands. The company’s ability to adapt to these transformations remains a key factor in its long-term success. With strong organic growth and favorable industry trends, Omnicom is well-positioned to capitalize on emerging opportunities.

For Q4 2024 and FY 2024, Omnicom reported a healthy 5.2% organic revenue growth, along with even stronger increases in adjusted EBITA and adjusted EPS. These results, combined with solid operational execution, reinforce confidence in the company’s ability to sustain momentum into 2025. Additionally, its planned acquisition of Interpublic is expected to create significant revenue and cost synergies, enhancing growth prospects beyond what it could achieve independently.

With a diverse portfolio, Omnicom is well-equipped to expand its global presence and continue delivering innovative solutions in a competitive market. The company’s key growth drivers include expansion into new products and markets and the development of cutting-edge creative solutions. Its broad service offerings appeal to a wide client base, and its ability to generate intelligent business outcomes strengthens its long-term sustainability.

The company achieved an earnings per share (EPS) of $2.41, surpassing analysts' consensus estimate of $2.38 by $0.03.

Earnings Trends & Cyclical

The first thing I like to examine is historical earnings trends. Looking at a 20-year period, Omnicom has shown 7.26% earnings growth—a steady but relatively slow pace. This figure doesn’t account for downturns or buybacks, which I’ll evaluate separately.

To gauge cyclicality, I look at past recessions. During the 2008 financial crisis, Omnicom’s adjusted earnings declined by 20%, which is fairly moderate given the scale of the recession. However, its stock price dropped nearly 60%, which was roughly in line with the overall S&P 500 decline.

Omnicom operates in the advertising industry and recently announced a merger with Interpublic Group—a stock I personally owned at the time. Unfortunately, the merger didn’t generate any significant returns for me, as these stocks tend to be slow movers. I initially bought it when valuations elsewhere were high, and it seemed at least fairly priced.

Valuation & Growth Considerations

One noteworthy event was the COVID-related drop, where Omnicom’s stock price plummeted by 177%. Looking at both adjusted and basic earnings, the data aligns, suggesting the decline was real and not just an accounting anomaly.

In terms of valuation, Omnicom currently trades at a P/E ratio of 10—less than half of the market average. However, a low P/E alone isn’t enough; earnings growth is equally important. The broader market likely has higher earnings growth, meaning over time, the market’s valuation will naturally adjust.

Omnicom’s earnings yield, which is the inverse of the P/E ratio, stands at 9.57%, which is quite strong. That said, the company does carry some debt, which impacts valuation considerations.

Instead of simply looking at the P/E ratio, I like to factor in long-term debt for a more complete picture. Omnicom’s long-term debt-to-capital ratio stands at 60%, meaning a significant portion of its capital structure relies on debt. If we adjust for that, the effective P/E would be closer to 16, rather than the headline P/E of 10.

Now, the S&P 500 also carries debt, so its adjusted P/E would be slightly higher as well. But even at 16x earnings, Omnicom doesn't appear quite as attractive as it initially seemed at a P/E of 10.

At first glance, Omnicom's earnings growth rate of 6.72% isn’t bad for a mature business. However, this number is somewhat misleading. For one, it doesn’t fully account for economic downturns—while the company bounced back after declines, earnings were uneven year-over-year. Simply averaging earnings growth smooths out volatility, making it appear more consistent than it actually is.

Another key factor is share buybacks. Over the past 10 years, Omnicom has repurchased about 20% of its outstanding shares, which inflates earnings per share (EPS) without true underlying growth. If we strip out the impact of buybacks, real earnings growth drops from 6.72% to just under 5%.

Growth vs. Inflation

Factoring in an inflation rate of around 3%, Omnicom’s real earnings growth comes in at roughly 2% per year. If we think about this from an owner’s earnings perspective, where you'd consider the entire business including its debt, Omnicom doesn’t seem as cheap as a P/E of 10 might initially suggest.

To evaluate whether the stock is reasonably priced, I typically look for an expected 10-year earnings CAGR (compound annual growth rate) of at least 8% before considering a buy. However, once adjusted for buybacks, Omnicom’s actual 10-year earnings growth rate is only 4.34%, falling short of my typical threshold.

Looking at revenue growth, Omnicom has expanded by just over 3% per year over the past three years, which aligns with the 10-year earnings expectation. However, when adjusting for inflation, its real revenue growth rate is only about 1% per year—essentially stagnant.

Market Sentiment

Recent Developments: In December 2024, Omnicom announced a $13 billion all-stock acquisition of Interpublic Group (IPG), aiming to create the largest advertising conglomerate by revenue. This merger is expected to yield $750 million in annual cost synergies and enhance competitiveness against tech giants.

Industry Position: The advertising industry is evolving rapidly due to technological advancements and changing consumer behaviors. Omnicom's strategic initiatives, including the acquisition of IPG, position it well to navigate these changes and capitalize on emerging opportunities.

Fair Valuation & Buy Price

Given its slow growth rate and ongoing industry disruption (hence the merger with Interpublic Group), Omnicom is fairly valued rather than deeply undervalued. Advertising is evolving rapidly, particularly with AI-driven changes, and the company hasn’t yet demonstrated a clear growth driver to offset these challenges.

Since I prefer businesses that can grow above inflation and maintain pricing power, Omnicom doesn’t fit my investment style. However, if you’re comfortable with slow growth and potential competitive risks, then a reasonable buy price would be around $75 per share. At that level, the stock would align with an 8% expected return, making it a more attractive entry point for value investors.

That said, I won’t be buying at that price because I focus on businesses with stronger long-term growth potential.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub