Interpublic Group of Companies (IPG) Annual Valuation – 2014

IPG_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 5 Undervalued Companies for the Defensive Investor.  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 Interpublic Group of Companies (IPG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): The Interpublic Group of Companies, Inc. (Interpublic) is a global advertising and marketing services companies. Interpublic’s companies specialize in consumer advertising, digital marketing, communications planning and media buying, public relations and specialized communications disciplines. The Company has two segments: Integrated Agency Networks (IAN) and Constituency Management Group (CMG). IAN is comprised of McCann, Draftfcb, Lowe, Mediabrands and its domestic integrated agencies. CMG is comprised of a number of its specialist marketing services offerings. In January 2014, Interpublic Group of Companies Inc announced that its division Lowe and Partners, announced the acquisition of the global digital network Profero.

IPG Chart

IPG data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7

  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 – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  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 – FAIL
  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 $16.30
MG Value $27.36
MG Opinion Undervalued
Value Based on 3% Growth $10.30
Value Based on 0% Growth $6.04
Market Implied Growth Rate 7.22%
Net Current Asset Value (NCAV) -$6.14
PEmg 22.94
Current Ratio 0.99
PB Ratio 3.12

Balance Sheet – 12/31/2013

Current Assets $8,084,000,000
Current Liabilities $8,165,300,000
Total Debt $1,129,800,000
Total Assets $12,905,000,000
Intangible Assets $3,792,800,000
Total Liabilities $10,689,800,000
Outstanding Shares 424,500,000

Earnings Per Share

2013 $0.60
2012 $0.90
2011 $0.96
2010 $0.50
2009 $0.18
2008 $0.52
2007 $0.26
2006 -$0.20
2005 -$0.70
2004 -$1.36

Earnings Per Share – ModernGraham

2013 $0.71
2012 $0.71
2011 $0.58
2010 $0.34
2009 $0.18
2008 $0.02

Dividend History

IPG Dividend Chart

IPG Dividend data by YCharts

Conclusion:

Interpublic Group of Companies is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company has a poor current ratio, has shown insufficient earnings stability or growth over the ten year historical period, does not pay dividends, and is trading at a high PEmg ratio.  For the Enterprising Investor, the company has too much debt relative to its current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of Glance at the Dow and 5 Low PEmg Companies for the Enterprising Investor.  From a valuation standpoint, the company appears undervalued after having grown its EPSmg (normalized earnings) from $0.18 in 2009 to $0.71 for 2013.  This level of demonstrated growth outpaces the market’s implied estimate of 7.22% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market 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 Interpublic Group of Companies (IPG)?  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:  The author did not hold a position in Interpublic Group of Companies (IPG) or any other company mentioned in the 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.


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Comments

2 responses to “Interpublic Group of Companies (IPG) Annual Valuation – 2014”

  1. Qaim Wynter Avatar
    Qaim Wynter

    How do you arrive at a $27.36 value per share?

    1. Benjamin Clark Avatar

      Qaim:

      The valuation is based on Benjamin Graham’s formula which is Value = EPS x (8.5 + 2g)

      On ModernGraham, we use a normalized EPS figure (“EPSmg”) taking into account the last five years of earnings data. For IPG, that EPSmg was $0.71 for 2013.

      To estimate the other variable, growth, we look at a cumulative average growth rate in EPSmg over the last five years. Here, the actual growth rate was 60.15% per year (EPSmg grew from $0.18 in 2009 to $0.71 in 2013). We then have a built-in safety margin which reduces the estimate in order to lessen the reliance on an arbitrary estimate. The growth rate after the safety margin is 45% per year here.

      However, the formula is intended to use a growth rate that can be achieved over the next 7-10 years. As a result, we put a maximum growth rate at 15%; companies achieving a growth rate higher than that over a long period of time are extremely rare. So in this case, IPG’s estimated growth over the next 7-10 years is 15%.

      Value = $0.71 x (8.5 + (2 x 15))
      Value = $0.71 x (8.5 + 30)
      Value = $0.71 x 38.5
      Value = $27.34 *slight variation caused by rounding

      Hope that helps!

      -Ben

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