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Omnicom (OMC) Rides on Organic Growth Amid Loss of Clients

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Omnicom Group Inc. (OMC - Free Report) looks strong on the back of organic growth. The company is expanding its digital and analytical capabilities.

Omnicom reported mixed second-quarter 2018 results wherein the company’s bottom line surpassed the Zacks Consensus Estimate but the top line missed the same. Earnings of $1.60 per share beat the consensus mark by 6 cents and increased 14.3% year over year. Total revenues of $3.86 billion missed the consensus mark of $3,89 billion but increased 1.8% year over year.

The company has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in all the previous four quarters, delivering an average positive earnings surprise of 3.9%. In the past 60 days, the Zacks Consensus Estimate for third-quarter earnings has been revised 3.2% downward while the same for full-year 2018 decreased 0.4%.

What’s Driving Omnicom?

Omnicom’s internal investments in its agencies, back office operations as well as in data, analytics and precision marketing look impressive. We believe such efforts help Omnicom witness solid organic growth, which in turn boosts its top line. In second-quarter 2018, organic growth was 2%. For 2018, the company expects organic growth to positively impact revenues by 2-3%.

Omnicom is expanding in areas of digital and analytical capabilities by investing in agencies and partnering with innovative technology companies in key markets. To this end, Omnicom’s media services division, Omnicom Media Group recently partnered with with IRI wherein IRI will serve as a preferred consumer packaged goods (CPG) data provider for Omnicom Media Group’s data and analytics division, Annalect. The company’s media group also acquired Brain Group, a digitally-focused agency for media planning, marketing and transformation consulting and content creation.

Omnicom’s operations are diversified across technology platforms, thus lowering its dependence on any one product in these dynamic technological markets. The company’s efforts to stay technologically updated to meet varying customer and client demands in areas of digital media, data as well as analytics look impressive.

We are also impressed with Omnicom’s endeavors to reward its shareholders in the form of dividend payments and share repurchases.In the first half of 2018, Omnicom returned $740 million to shareholders through dividends and share repurchases. In 2017, the company paid $515.2 million in dividends and repurchased shares worth $568.4 million. In 2016, the company returned $505.4 million of dividends and $602.2 million through share buyback. Such moves indicate the company’s commitment to create value for shareholders and underline its confidence in its business.

Risks

Omnicom is grappling with client losses that weigh on its North America revenues, which declined 3.6% year over year on a reported basis and 0.9% organically in second-quarter 2018. The company is also exposed to client concentration risk, as it earns almost 51% of revenues from its largest 100 clients.

Vast global presence exposes Omnicom to foreign exchange rate risks and uncertainty from monetary devaluation. The company generates almost 46% of revenues from its international operations. Dependence on information technology systems makes the company vulnerable to cybersecurity threats and attacks like material security breaches, theft, modification or loss of data, employee malfeasance and other related threats.

So far this year, shares of Omnicom have declined 4.1% compared with 9.3% fall of the industry it belongs to.

 

Zacks Rank & Stocks to Consider

Currently, Omnicom carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the broader Business Services sector include Heidrick & Struggles International (HSII - Free Report) , BG Staffing (BGSF - Free Report) and FactSet (FDS - Free Report) . While Heidrick & Struggles International sports a Zacks Rank #1, BG Staffing and FactSet carry a Zacks Rank #2 (Buy).

The long-term expected EPS (three to five years) growth rate for Heidrick & Struggles International, BG Staffing and FactSet is 13.5%, 20% and 10.6%, respectively.

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