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Omnicom Group Inc. Annual Valuation – 2015 $OMC

Omnicom_Group_LogoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – March 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Omnicom Group Inc. (OMC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Omnicom Group Inc. is an advertising and marketing communications services company. The Company’s networks and specialty firms provide advertising, strategic media planning and buying, digital and interactive marketing, direct and promotional marketing, public relations and other specialty communications services to more than 5,000 clients in more than 100 countries. As a strategic holding company, Omnicom manages a portfolio of global market leaders consisting of three global advertising agency networks, BBDO, DDB and TBWA; numerous leading national advertising agencies; a global network of more than 175 marketing services companies, and a media group, Omnicom Media Group, that includes two providers of media planning and buying services. Its subsidiaries offer services in over 30 marketing communications disciplines across more than 200 strategic brand platforms.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $77.02
MG Value $72.15
MG Opinion Fairly Valued
Value Based on 3% Growth $54.36
Value Based on 0% Growth $31.86
Market Implied Growth Rate 6.02%
Net Current Asset Value (NCAV) -$30.16
PEmg 20.55
Current Ratio 0.93
PB Ratio 6.74

Balance Sheet – December 2014

Current Assets $11,191,000,000
Current Liabilities $12,061,000,000
Total Debt $4,563,000,000
Total Assets $21,560,000,000
Intangible Assets $9,212,000,000
Total Liabilities $18,710,000,000
Outstanding Shares 249,300,000

Earnings Per Share

2014 $4.24
2013 $3.71
2012 $3.61
2011 $3.33
2010 $2.70
2009 $2.53
2008 $3.14
2007 $2.93
2006 $2.50
2005 $2.18
2004 $1.94

Earnings Per Share – ModernGraham

2014 $3.75
2013 $3.39
2012 $3.18
2011 $2.95
2010 $2.76
2009 $2.75

Dividend History

Conclusion:

Omnicom Group Inc. is not suitable for the Enterprising Investor or for the Defensive Investor.  The Defensive Investor is concerned by the the low current ratio, and the high PEmg and PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.76 in 2010 to $3.75 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 6.02% annual earnings growth over the next 7-10 years, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Omnicom Group Inc. (OMC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Omnicom Group Inc. (OMC) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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