Omnicom Group Stock Price as of Publication: $73 per share.

Omnicom Group stock price has lagged the market significantly over the last two years. At the time when the market is up by 40%, Omnicom was down by nearly 2% and its closest US-based competitor, The Interpublic Group of Companies, was up 15%. 

In a bull market, Omnicom shouldn’t be in anyone’s portfolio as the global advertising firm is having tons of challenges from the digital advertisers of our time; Facebook, Amazon, and Alphabet. However, there are huge skepticisms towards the continuity of this aging bull market. To make money in case the bull market ended and the economy was still growing, we are recommending Omnicom Group to be part of our readers’ portfolio. 

The company’s main challenge is growing its topline which has been flat to slightly declining over the last 3 years. The company’s main market, North America, is declining in the low single digits, and the company’s global markets, mainly Latin America, Europe, and the Middle East, are slightly offsetting that decline. 

The company is a cash cow. It generated, on average, $0.12 for each $1 dollar of revenues in free cash flows. That’s pretty solid. 

Also, over the last three years the company generated $5.6 billion in free cash flows, which with its current EV of nearly $19 billion, produces a multiple of 3.15x. On the other hand, Interpublic Group of Companies, which is having similar challenges with Omnicom, generated only $1.046 billion in FCF over the last three years, and with an EV of $11.3 billion, the company’s EV to 3-year FCF would be at 10.5x. 

Not to forget, OMC’s free cash flow yield (FCF per share divided by stock price) is 10.2% while that of IPG is slightly above 2%. 

Based on market cap to 3yr FCF and FCF yield, Omnicom Group is 3 to 5 times cheaper than Interpublic Group of Companies while having a higher EBITDA margin (15.5% vs 14% for IPG). It’s also worth mentioning that both companies have a very close growth rate  with IPG growing on average 1% more than Omnicom due to the bigger size of the latter (Omnicom generated $15.2 billion in 2017 while IPG generated $7.8 billion). 

In addition, Omnicom Group returned $3.4 billion to shareholders over the last three years in forms of dividends and share repurchases. The company is still targeting nearly $1 billion per year in a 50%-50% mixture of dividends and share repurchases, which is 5.5% of the current market cap of the company. 

Final Thoughts: As many other industries, the offline advertising business is facing deep challenges from the digital world. However, the industry can still grow with the economy at the long-term. Thus, sticking to the best in breed can yield attractive returns given the low risk of such low-beta stock. We recommend owning Omnicom Group stock and our price target is around $101 per share (30% upside from current levels) based on an 8% FCF yield (FCF per share was $8.11 in 2017) which is still higher than its two competitors IPG (2.2% FCF yield) and the Paris-based Publicis Group which its stock is having a 6.2% FCF yield. 

Please note that Y-Charts numbers are wrong on Omnicom Group.