As recessions dawn, advertising budgets are the first casualty. As growth returns, companies ramp up advertising because they're hell-bent on expanding market share.
Interpublic is scheduled to release first-quarter results tomorrow. Fourth-quarter profit tumbled 37% to $136 million, or 24 cents a share, as revenue declined 5.3% to $1.8 billion. The operating margin narrowed from 18% to 15%. Return on assets, a measure of profitability, dropped from 11% to 3.8%, lagging behind the advertising industry average of 22%. Still, Interpublic has $2.5 billion of cash and $1.9 billion of debt, lending its balance sheet a liquid tilt.
Looking at the last boom period, Interpublic was able to achieve superior growth. Over a three-year span, the company has boosted net income 76% annually, on average, and increased earnings per share 38% a year. Its stock has fallen 8.5% a year since 2007, but rebounded in the stock-market rally. It has surged 78% during the past year and has risen 31% in 2010.
At a price-to-projected-earnings ratio of 20, Interpublic is fairly valued relative to competitors' shares. But a price-to-book ratio of 1.9, a price-to-sales ratio of 0.8 and a price-to-cash-flow ratio of 8.9 reflect 51%, 63% and 46% discounts to peer averages. The stock's PEG ratio, a measure of value relative to expected growth, of 0.8 is 33% less than the industry average. A PEG ratio of less than one signifies a bargain.
Of analysts covering Interpublic, 15, or 78%, rate its stock "buy" and four rate it "hold." None rank the shares "sell."
expect the stock to hit $12, leaving a potential 24% return.
is less optimistic, expecting the shares to gain a smidgeon to $10.
stock model just upgraded Interpublic to "buy" and expects it to climb 35% to $12.95.
During the fourth quarter, five of the stock's 10 largest holders, including
Bank of New York Mellon
, purchased more shares. Five decreased their holdings.
controls 7.7% of the float and
owns 6.9%. Interpublic has a market value of $4.8 billion and a beta, a measure of market correlation, of 1.5, tending to magnify stock-market indices' direction.
-- Reported by Jake Lynch in Boston.