Stock Pick Of The Week: Interpublic Group (IPG)

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Interpublic Group (IPG) is one of the world’s largest advertising and marketing conglomerates.

The bullish Chaikin Power Gauge rating reflects very strong price and volume activity in addition to net insider buying. Analysts have very bullish ratings on IPG and have been raising their earnings estimates for 2014. The stock recently broke out to new highs above 18 and has now consolidated those gains in a sideways trend over the past 8 days.

The bullish case for Interpublic Group stems from internal and external developments. IPG was the first of the global advertising conglomerates, converting to a holding company in 1962 when it was known as McCann Erickson. It acquired a number of boutique agencies and grew to become the 4th largest ad agency in the world.

The company has been working hard to grow profit margins, currently at 9.2% and lagging the industry average, but under highly regarded CEO Michael Roth, a tax accountant by training, IPG recently reported a strong quarter, beating analyst estimates by $0.05 cents while beating on top line revenues as well. Current fiscal year estimates are $1.02 per share with next year’s forecast at $1.20. From a value perspective the Interpublic Group of Companies with $36 billion in billings and $7.2 billion in revenue is a cash cow. With a market cap of $8.26 billion it sells at a low Price to Sales ratio of 1.16x.

Combine this with a 2% yield and an aggressive buy back program which has reduced shares outstanding by 20% over the past two years and you have an attractive stock in an advertising era where digital is becoming more important and multi-dimensional client presentations are now the rule. This all speaks to consolidation to achieve both economies of scale and depth of resources.

The current strength in IPG shares is directly related to the May breakdown in merger negotiations between the world’s two largest advertising agencies, Omnicom (OMC) and the French ad conglomerate, Publicis. IPG has now been identified by both Mario Gabelli and Jim Cramer, two savvy Wall Street analysts, as a potential target for either of these world-wide ad behemoths who have expressed the desire to grow through mergers or acquisitions. Interpublic’s market cap is $8.3 billion compared more than $18 billion for OMC or Publicis. This would make an acquisition relatively easy to accomplish.

That Interpublic Group now has an acquisition bull’s eye on its back is well known. Adding weight to this is the very aggressive call option buying which has been noted over the past 4 weeks. This suggests that smart investors are betting on a quick merger bid for IPG. It is interesting to note that the stock market has favored companies growing through acquisitions in 2013. This outgrowth of the Fed’s QE policy which has left companies awash with cash and spending it through acquisitions or buybacks rather than internal expansion has seen acquiring companies show stock price increase of 48% on average over the past year, according to a Merrill Lynch study.

With lagging but improving operating margins, a low price to sales ratio and a strong technical breakout, IPG with takeover written all over it, is an attractive speculation at current levels. Piper Jaffray recently raised their price target on Interpublic to $21 and reiterated their buy recommendation on the stock. It is reasonable to expect a bigger takeover premium, particularly if more than one agency conglomerate decides that IPG is the road to growth. The bullish Chaikin Power Gauge rating supports this conclusion.

Interpublic Group (IPG)

Interpublic Group (IPG)


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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