A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions.
Here we focus on Omnicom Group Inc.OMC , a stock with an expected long-term earnings per share growth rate of 5.8%. Moreover, its earnings are expected to register 10.8% and 7.4% growth, respectively, in 2018 and 2019.
The company has outperformed the S&P 500 in the past six months. Shares of Omnicom have gained 7.4% compared with the S&P 500's rally of 4.9% in the said time frame.
We believe the stock has the potential to exceed expectations moving ahead. The reasons behind our optimism include the company's higher organic growth and benefits from strategic investments, acquisitions and expansion efforts.
Robust Organic Growth
We appreciate Omnicom's continuous focus on its internal development initiatives. To increase efficiency, the company has been making internal investments in its agencies and back office operations. It has also raised its internal investments in data, analytics and precision marketing. Driven by such positives, we expect Omnicom to witness higher revenues on the back of organic growth.
Notably, in first-quarter 2018, organic growth resulted in a 2.4% increase in total revenues. It marked an improvement from 1.6% organic growth in fourth-quarter 2017. Further, the company expects organic growth to positively impact revenues by 2-3% in 2018.
GrowingDigital and Analytical Capabilities
Omnicom is expanding its suite in the areas of digital and analytical capabilities by investing in agencies and partnering with innovative technology companies in key markets.
On Apr 16, 2018, Omnicom's media services division, Omnicom Media Group announced a partnership with IRI. Per the deal, IRI will serve as a preferred consumer packaged goods (CPG) data provider for Omnicom Media Group's data and analytics division, Annalect. In Germany, Omnicom media group acquired Brain Group, a digitally-focused agency for media planning, marketing and transformation consulting and content creation.
Omnicom's operations are diversified across technology platforms, thus lowering its dependence on any one product in these dynamic technological markets. The company's efforts to stay technologically updated to meet varying customer and client demands in areas of digital media, data as well as analytics look impressive. All these initiatives augur well for the long-term growth and stability of the company.
Encouraging Balance Sheet
Management has executed well in the recent times. This has helped Omnicom build cash and cash equivalents and short-term investments balance of $3.79 billion in 2017. The company's cash position has improved considerably in the past few years. In 2016, 2015 and 2014, the company had $3.02 billion, $2.62 billion and $2.39 billion of cash and cash equivalents and short-term investments, respectively.
The company generated $2.02 billion of cash from operating activities in 2017 compared with $1.95 billion in 2016. The significant amount of cash provides it the flexibility to pursue any growth strategy. The company's strong cash flow generating abilities make it a value buy for investors.
We are impressed with Omnicom's consistent record of returning value to shareholders in the form of dividend and share repurchases. Omnicom paid dividends of $515.2 million, $505.4 million and $496.7 million to its shareholders, respectively in 2017, 2016 and 2015. The company repurchased shares amounting to $568.4 million, $602.2 million and $727.5 million, in 2017, 2016 and 2015, respectively. During the period from 2008 through Mar 31, 2018, Omnicom distributed 106% of net income to shareholders through dividends and share repurchases.
Such moves indicate the company's commitment to create value for shareholders and underline its confidence in its business. These shareholder-friendly initiatives not only instill investors' confidence but also positively impact earnings per share.
The aforementioned factors positively impacted Omnicom's performance in the last reported quarter. The company outperformed the Zacks Consensus Estimate in the trailing four quarters, delivering an average positive surprise of 3.2%. We believe the upbeat performance will continue in the quarters ahead, thus giving investors enough reasons to remain optimistic on the stock. Moreover, the Zacks Consensus Estimate for current quarter earnings is pegged at $1.57, indicating year-over-year growth of 12.1%.
Zacks Rank &Stocks to Consider
Currently, Omnicom has a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the broader Business Services sector are Automatic Data Processing ADP , Mastercard Incorporated MA andBroadridge Financial Solutions Inc. BR . While Mastercard sports a Zacks Rank #1, Automatic Data Processing and Broadridge carry a Zacks Rank #2 (Buy).
The expected long-term earnings per share growth rate for Automatic Data Processing, Mastercard and Broadridge is 11%, 19.03% and 10%, respectively.
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