Uncategorized
Sector Allocation a Strength During COVID at IPG
admin | October 2, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Interpublic Group of Companies (IPG, Baa2 (n)/BBB (n)/BBB+ (n)) most recent results outperformed its advertising agency peers due to the company’s sector allocations, most notably its exposure to the healthcare sector, which accounted for over 25% of revenues in the quarter. Other top-performing sectors that IPG has a large presence in were food & beverage, retail, technology and telecom. The company has been outperforming its peer group with respect to organic growth for the past five fiscal years, yet continues to be one of the widest trading credits in the media space, despite having better ratings and better leverage than some media companies.
Better Performance, Lower Leverage
While organic revenues were down 9.9% during the quarter, the decline was significantly better than Omnicom’s (OMC – Baa1/BBB+) 23.0% organic sales drop in the quarter. Additionally, IPG outperformed its overseas peers Publicis (PUBFP – Baa2 (n)/BBB) and WPPLN (Baa2 (n)/BBB (n)/BBB+ (n)) whom witnessed organic sales declines of 13.0% and 15.1%, respectively. As an example, IPG’s gross leverage at the end of the quarter stood at 3.0x, while Discovery Inc. (DISCA – Baa3/BBB-/BBB-) posted gross leverage of 3.4x. We note that IPG repaid its $500 million maturity on 10/1/20 with cash on hand, bringing total leverage down 4 ticks to 2.6x. With the aforementioned debt reduction, IPG’s leverage now stands a tick better than OMC’s leverage, which was 2.7x at 2Q20.
Exhibit 1. BBB Media 3Y-10Y Curve
Source: Bloomberg TRACE; Amherst Pierpont Securities
Organic Outperformance
IPG has been outperforming its industry peers from an organic growth perspective since 2015. Over the past five fiscal years, IPG’s organic annual growth rate was on average +280 bp higher than its peers, with 2018 its largest outperformance of +480 bp. Management remarked on its last earnings call that not only are they outperforming from a revenue perspective but also in terms of net new business. That said, they expect to see a bit of a recovery in revenues in the back half of the year. While management would not speculate whether it would be witnessed in 3Q or 4Q or both, they were encouraged by the new business wins that they deemed “not at risk”.
Exhibit 2. IPG vs. Peer Organic Growth (2015-2019)
Source: Company 10K; Amherst Pierpont Securities
Cost Restructuring Remains a Focus
The company aggressively managed operating expenses during the quarter to the “reality of the rapidly developing recession” in an effort to preserve margins as effectively as possible. Net operating expenses during the quarter were reduced 9% from the year-ago period, with each of the company’s principal cost categories – payroll, temporary labor, performance-based incentives and office expenses – down. With furloughs and layoffs part of the expense reduction, IPG felt it would be prudent to reduce its office square footage by just under 5% during the quarter (~500ksf). Restructuring charges totaled $113 million during the quarter ($68 million were non-cash charges) and are expected to result in annualized savings of $80 million to $90 million, which should begin to materialize in 3Q20. The company’s adjusted EBITDA margin before restructuring charges was 9.4% in the quarter, down 400 bp year-over-year. For the back half of the year, management is anticipating further restructuring charges of $90 million to $110 million. The savings anticipated from the next round of restructuring charges are expected to be meaningful.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
