Omnicom Group Inc. (OMC) Annual Valuation – 2014
Benjamin 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.  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. fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Omnicom Group Inc. (Omnicom) is a holding company, providing professional services to clients through multiple agencies. Omnicom is a global advertising, marketing and corporate communications company. Its agencies operate in markets worldwide and provide a range of services, which the Company group into four disciplines: advertising, customer relationship management (CRM), public relations and specialty communications. The services provided by the Company include advertising, brand consultancy, corporate social responsibility consulting, data analytics, entertainment marketing, healthcare communications and promotional marketing. In March 2014, Omnicom Group Inc and TBWA announces acquisition of Brazilian agency Mood.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $72.06 |
| MG Value | $55.69 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $50.21 |
| Value Based on 0% Growth | $29.43 |
| Market Implied Growth Rate | 6.16% |
| Net Current Asset Value (NCAV) | -$26.65 |
| PEmg | 20.81 |
| Current Ratio | 0.95 |
| PB Ratio | 5.18 |
Balance Sheet – 12/31/2013
| Current Assets | $11,652,300,000 |
| Current Liabilities | $12,277,700,000 |
| Total Debt | $4,033,400,000 |
| Total Assets | $22,098,700,000 |
| Intangible Assets | $9,302,000,000 |
| Total Liabilities | $18,516,300,000 |
| Outstanding Shares | 257,600,000 |
Earnings Per Share
| 2013 | $3.81 |
| 2012 | $3.70 |
| 2011 | $3.36 |
| 2010 | $2.73 |
| 2009 | $2.55 |
| 2008 | $3.17 |
| 2007 | $2.95 |
| 2006 | $2.50 |
| 2005 | $2.18 |
| 2004 | $1.94 |
Earnings Per Share – ModernGraham
| 2013 | $3.46 |
| 2012 | $3.23 |
| 2011 | $2.98 |
| 2010 | $2.78 |
| 2009 | $2.76 |
| 2008 | $2.76 |
Dividend History
OMC Dividend Yield (TTM) data by YCharts
Conclusion:
Omnicom Group Inc. does not satisfy the requirements of either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the turn offs are the poor current ratio and the high PEmg and PB ratios.  For the Enterprising Investor, the company fails because of the high level of debt relative to the current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities, through a review of 5 Undervalued Companies for the Enterprising Investor and 5 Undervalued Companies for the Defensive Investor.  From a valuation perspective, the company appears to be overvalued, after growing its EPSmg (normalized earnings) from $2.76 in 2009 to $3.46 in 2013.  This demonstrated level of growth does not support the market’s implied estimate of 6.16% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below 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.
If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Omnicom Group Inc. (OMC) or any of the other companies listed 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; this article is not affiliated with the company in any manner.
