The Interpublic Group of Companies, Inc. (NYSE:IPG) shares are down more than -13.80% this year and recently increased 0.15% or $0.03 to settle at $20.18. Omnicom Group Inc. (NYSE:OMC), on the other hand, is down -14.11% year to date as of 12/14/2017. It currently trades at $73.10 and has returned 0.01% during the past week.
The Interpublic Group of Companies, Inc. (NYSE:IPG) and Omnicom Group Inc. (NYSE:OMC) are the two most active stocks in the Advertising Agencies industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect IPG to grow earnings at a 10.57% annual rate over the next 5 years. Comparatively, OMC is expected to grow at a 8.05% annual rate. All else equal, IPG’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 15.84% for Omnicom Group Inc. (OMC). IPG’s ROI is 18.90% while OMC has a ROI of 19.80%. The interpretation is that OMC’s business generates a higher return on investment than IPG’s.
The value of a stock is simply the present value of its future free cash flows. IPG’s free cash flow (“FCF”) per share for the trailing twelve months was -0.24. Comparatively, OMC’s free cash flow per share was +0.03. On a percent-of-sales basis, IPG’s free cash flow was -1.19% while OMC converted 0.04% of its revenues into cash flow. This means that, for a given level of sales, OMC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. IPG has a current ratio of 0.90 compared to 0.90 for OMC. This means that IPG can more easily cover its most immediate liabilities over the next twelve months. IPG’s debt-to-equity ratio is 1.04 versus a D/E of 1.97 for OMC. OMC is therefore the more solvent of the two companies, and has lower financial risk.
IPG trades at a forward P/E of 12.90, a P/B of 3.90, and a P/S of 1.01, compared to a forward P/E of 13.43, a P/B of 6.70, and a P/S of 1.12 for OMC. IPG is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. IPG is currently priced at a -15.17% to its one-year price target of 23.79. Comparatively, OMC is -10.78% relative to its price target of 81.93. This suggests that IPG is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for IPG and 2.90 for OMC, which implies that analysts are more bullish on the outlook for OMC.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. IPG has a beta of 1.44 and OMC’s beta is 1.22. OMC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. IPG has a short ratio of 4.11 compared to a short interest of 9.69 for OMC. This implies that the market is currently less bearish on the outlook for IPG.
The Interpublic Group of Companies, Inc. (NYSE:IPG) beats Omnicom Group Inc. (NYSE:OMC) on a total of 9 of the 14 factors compared between the two stocks. IPG is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, IPG is the cheaper of the two stocks on an earnings, book value and sales basis, IPG is more undervalued relative to its price target. Finally, IPG has better sentiment signals based on short interest.