At Omnicom, an Ad Shop Turns Venture Capitalist

The stock offers a way to play the Net boom with few risks.
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SAN FRANCISCO -- When

Agency.com

(ACOM)

rose 192% on its first day of trading Dec. 8, the financial press dutifully praised the corporate Web-site builder and overlooked another, less obvious winner:

Omnicom

(OMC) - Get Report

, the world's largest advertising group.

Omnicom, the ad shop best known for planting phrases such as "Got Milk?" and "Drop the Chalupa" into the minds of the masses, was prescient enough to buy a 47% stake in Agency.com for $11.7 million way back in 1995. At the close of Agency.com's first day, that investment was worth nearly $1.2 billion.

Yet Agency.com is merely the tip of Omnicom's investment iceberg. All told, Omnicom's 12 announced investments in Web builders and other companies in hot Net sectors mimic

CMGI's

(CMGI)

investment strategy, with a focus on Net advertising and marketing. Analysts estimate that Omnicom has generated around $3.5 billion in market capitalization -- or $18 per Omnicom share -- from total initial investments of $92 million. The result is a play offering much of the upside of a dot-com, but less of the overall risk thanks to the company's steady and growing advertising business.

"The fundamentals of this company have been unblemished for so long," says

Merrill Lynch

analyst Lauren Fine. "It's been a safe way to play the dot-com side." Merrill, which hasn't done underwriting for Omnicom, raised its price target to 115 Tuesday. Merrill has an accumulate rating on the stock, its second-highest rating.

Thanks to the company's solid fundamentals -- and, perhaps more importantly, its growing portfolio of Internet service firm investments -- Omnicom shares this year are up 72%, trading around 100 Wednesday, compared with a gain of 15% for the

S&P 500

. Revenue jumped 31% to $4.1 billion in 1998. And analysts predict total 1999 revenue of $5 billion, up 22%. In the most recent quarter, Omnicom earned 39 cents a share, beating the Street's consensus estimate by a penny.

That's par for the course. Omnicom has met or exceeded the Street's earnings estimates for 23 consecutive quarters, averaging compound annual earnings growth of 15.3% since 1987. Over the same period, shareholders have seen average annual returns of 31%. "Omnicom is best in their class," says Phil Dano, analyst with

Munder Capital

, one of Omnicom's top investors.

Flipping Out

Through its

Communicade

division, Omnicom holds stakes in Web builders such as

Razorfish

(RAZF)

and

Think New Ideas

(which recently merged with

AnswerThink

(ANSR)

). And several others in its portfolio are preparing to go public, including online job-search service

CareerMosaic

, Web ad shop

L90

and Web-building pioneer

Organic

, which filed Nov. 24 to go public. Analysts expect many of these companies to prosper because they are the Internet economy's engineers and construction workers.

John Wren, chief architect of this strategy and Omnicom's CEO and president, says the company has considered spinning off the division but has no immediate plans to do so. "God knows we've been pitched by investment bankers all the time to spin it off," Wren jokes. "We're keeping the financial engineers away from it. Someday who knows?"

Rather than looking for the quick Big Score, Omnicom aims to find companies that will drive its growth. "They're not flippers," Dano says. "They're looking at these as strategic parts of their portfolio to clients." CEO Wren says its dossier of dot-coms will ensure that the company stays "at the leading edge of communicating to consumers."

Analysts back that up. Omnicom's investments have given it "a front row seat to all the advances that are being made," Fine says. "They're getting the expertise and nurturing it internally."

Yearly Gains' Comparison
Omnicom up 72% this year

Meanwhile, Omnicom keeps searching for more start-ups to secure a foothold in emerging markets. On Dec. 6, Omnicom put down $25 million for a 20% stake in

Dash.com

, which makes a software that tracks down bargains for Web shoppers. The investment positions Omnicom in the growing market for e-commerce services. And Omnicom CEO and President John Wren hinted at a

PaineWebber

investment conference recently that two more acquisitions are likely to go down in the coming weeks, with more in the future.

"I'm totally convinced that this space has been only 15% discovered," says Wren, who adds he is currently in conversations with 10 other firms. "When the whole mobile trend happens, I got to believe it's going to take this to a level that no one has seen so far."

Even if Omnicom weren't acting like a whip-smart strategic investor, its underlying ad business continues to grow, driven by spending from dot-coms and its ability to win the lion's share of that new business. Omnicom was founded in 1986 through the combination of three major ad agencies:

BBDO

,

Doyle Dane Bernbach

and

Needham Harper Steers

. Omnicom also manages a collection of marketing companies, which includes some of the leading firms in direct response, public relations and promotional marketing, making it a branding behemoth.

The Valuation Game

One risk Omnicom investors face is valuation. Taking out the $3.5 billion in dot-com market cap, Merrill's Fine estimates that Omnicom is trading at 17 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), with a price-to-earnings ratio of around 35. Including the Net assets, its P/E is 44; that compares with a P/E ratio of around 39 for

Interpublic

(IPG) - Get Report

and 33 for

Young & Rubicam

(YNR)

, its two closest competitors.

But at least investors won't have to lose too much sleep over a correction, say some analysts. Omnicom's broad range of assets, Fine says, provide a great hedge against any inevitable and forthcoming market downturn.

"It's such a greatly diversified company," Fine says. "At any given time Omnicom will represent what is growing in the economy."

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