Omnicom Group Inc. (OMC) posted strong operating results for the first quarter of 2011 on April 19.
During the quarter, Omnicom’s net income grew 23.6% year over year to $ 201.9 million from $ 163.4 million in the first quarter of 2010. Earnings per share (EPS) expanded by 17 cents from 52 cents in the year-ago quarter to 69 cents in the reported quarter. Reported EPS also beat the Zacks Consensus Estimate of 59 cents.
Total revenue was $ 3,151.3 million, up 7.9% year over year from $ 2,920.0 million in the corresponding quarter of the previous year. Revenue surpassed the Zacks Consensus Estimate of $ 3,133.0 million. Omnicom recorded a 5.2% organic growth.
Domestic and International revenue rose 3.8% and 12.9% to reach $ 1,652.5 million and $ 1,498.8 million, respectively. The increase was attributed to the general business environment, which continues to stabilize and improve.
Omnicom generated approximately 44.9% of revenue from Traditional Media Advertising, 36.9% from CRM, 9.1% from Public Relations and the remaining 9.2% from Specialty Communications. Revenue by discipline grew in all categories: Advertising increased 7.8% year over year, CRM 8.9%, Public Relations 3.9% and Specialty Communications increased 8.8%.
Operating expenses as a percentage of revenue decreased by 40 basis points year over year to 89.1%. Operating income grew 10.7% to $ 322.1 million, which resulted in an operating margin of about 10.2%, up 20 basis points compared with last year. EBITA increased 11.6% to $ 342.8 million and EBITA margin rose by 40 basis points to 10.9%.
Twelve months ended March 31, 2011, Omnicom’s net debt was approximately $ 1.7 billion, up from $ 1.3 billion in the comparable period of 2010.
Operating cash flow in the first quarter was ($ 197.8) million versus ($ 277.9) million in the year-ago quarter while capital spending was $ 15.5 million versus $ 25.2 million in the first quarter of 2010.
Omnicom’s key growth strategy is to enhance its client’s base, which is its major focus. Further, Omnicom also has a strategy to acquire complementary companies with strong entrepreneurial management teams to expand its client base. Moreover, markets are picking up and the improving economic conditions should benefit Omnicom as they help increase consumer spending.
However, extreme dependence on clients is risky as the loss of a client or reduction in client spending could adversely affect the company’s results. An intensely competitive advertising environment and pricing pressures remain causes of concern.
Omnicom’s direct competitors are Interpublic Group of Companies Inc. (IPG) and WPP plc. (WPPGY). However, management remains committed to expanding its business and relationships in Asia, where operating conditions remain extremely favorable. This should improve the long-term profitability of the company.
Hence, we maintain a Neutral recommendation on the stock.
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