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Low Marketing Impact: Omnicom Group Stock Will Not Return To Pre-Covid Level

We believe that Omnicom Group stock (NYSE: OMC) may be a good opportunity at the present time. Omnicom Group is a leading marketing communications company engaged in brand advertising, customer relationship management (CRM), and media planning. OMC trades at $52 currently and is, in fact, down 34% so far this year (from $79 at the beginning of 2020). It traded at $77 in February 2020 – just before the coronavirus pandemic hit the world – and is currently still 32% below that level, as well. This is after OMC stock gained over 11% from its March lows of $47 to reach $52 as on 12th October 2020, compared to the S&P 500 which increased a little over 54% during this time. The stock underperformed the market because of customer companies cutting down on marketing spend as the focus has been on survival. But the gradual opening up of the economy and projected turnaround in business prospects of corporates in 2021 is likely to see companies increasing their investments in marketing and advertising, albeit at a slower pace. This could drive the stock 15% higher from its current level. Our conclusion is based on our comparative analysis of Omnicom Group stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 54% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how OMC stock and the broader market fared during the 2007-08 crisis

Timeline for 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

OMC and S&P 500 Performance Over 2007-08 Financial Crisis

OMC stock declined from levels of about $35 in September 2007 (pre-crisis peak) to levels of $17 in March 2009 (as the markets bottomed out), implying OMC stock lost 50% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of close to $29 in early 2010, rising by 66% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

OMC Fundamentals Over Recent Years Have Been Strong

OMC revenues declined marginally from $15.1 billion in 2015 to $15 billion in 2019, due to foreign currency effects and dispositions during the period. Despite lower revenues, margins improved over recent years with EPS increasing from $4.43 in 2015 to $6.09 in 2019. However, the company’s Q2 revenues saw a 25% y-o-y decline due to lower marketing spending by all category of clients except healthcare. Earnings came in at -$0.11/share as against $1.68/share in the year-ago period, mainly due to lower revenue and loss from dispositions.

Does OMC Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

OMC’s total debt dropped significantly from $28.7 billion in 2016 to $7.8 billion at the end of Q2 2020, while its total cash went up from $3 billion to $3.3 billion over the same period. At the same time, the company’s cash from operations remained almost stable around $2 billion. The company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. As investors focus their attention on expected 2021 results, we believe Omnicom Group stock has the potential for modest gains of about 15% to reach $60 once fears surrounding the Covid outbreak are put to rest. The stock is unlikely to go back to pre-Covid levels anytime soon as the customers’ marketing investment, which has been pushed forward, will take time to gather steam.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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