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On Mar 18, Zacks Investment Research downgraded Omnicom Group Inc (OMC - Analyst Report)  to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold) primarily due to downward estimate revisions. A competitive and fragmented communications services industry further forces us to take a sideline stance.

Despite the downtrend, the company still has the potential to drive the stock up. The stock is currently trading at a forward P/E of 17.5x and its growth expectation for the next five years is pegged at of 7.1%.

Why the Downgrade?

Omnicom reported fourth-quarter 2013 net income of $300.5 million or $1.13 per share versus $307.1 million or $1.13 in the year-ago quarter. The reported earnings were affected by $13.3 million pre-tax charges following Omnicom's proposed merger with Publicis Groupe SA (PUBGY) .

The Publicis merger is dragging mainly due to a lengthy tax approval process and regulatory hurdles. The delay also leaves uncertainty regarding the top management role and other executive roles within the new company. The complex transaction is taking longer-than–expected time and is increasing speculative fears due to closing and integration risk involved with the proposed merger. Omnicom is also not making any share repurchases during this interim period.
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A significant portion of Omnicom’s revenues comes from Europe. In the present scenario, when the economy in the region is highly unstable, it becomes difficult for the company to increase revenues and reduce costs. In addition, the company faces concentration risk as it relies on a few big clients for its businesses. This often reduces its operating margins and affects its profitability.

Over the past week, Omnicom has witnessed flat earnings estimate revisions for 2014. This flat revision seems to have resulted from the fact that Omnicom failed to comprehensively beat analysts’ expectations and posted in-line earnings. A combination of all these factors weighed on the earnings estimates for Omnicom in the last 60 days. The Zacks Consensus Estimate for fiscal 2014 has gone down to $4.13 per share from $4.21 per share during this period while it dropped to $4.44 per share from $4.61 per share for 2015.

Other Stocks to Consider

Omnicom currently has a Zacks Rank #4 (Sell). Other stocks that look promising in the industry include Millennial Media Inc. (MM - Snapshot Report) carrying a Zacks Rank #1 (Strong Buy), and MDC Partners Inc. (MDCA - Snapshot Report) carrying a Zacks Rank #2 (Buy).

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