Omnicom Is Already Discounting A Gentle Recession (NYSE:OMC)

0

Moyo Studio/E+ via Getty Images

With shares of Omnicom Group (NYSE:OMC) near their 52 week low, we thought we would revisit the company and see if the valuation is already discounting a recession. We already covered the basics of the company for those unfamiliar with it in a previous article. In this article we will focus more on the current valuation, and whether a recession is already priced in.

Omnicom price chartData by YCharts

Q1 2022 Results

For Q1 Omnicom delivered solid results, with 11.9% organic revenue growth and $300 million in share repurchases during the quarter. Net income per diluted share was $1.39 after adjusting for charges of $0.56 per share that resulted from the war in Ukraine.

Omnicom Group First Quarter 2022

Omnicom Group Investor Presentation

Despite the share price decline, the operating business clearly remains healthy, with the company having recovered all of the earnings power lost during the Covid crisis. As we’ll see later in more detail, part of the earnings increase has been thanks to significant share repurchases, but in general the core business remains healthy.

Omnicom normalized diluted EPSData by YCharts

Balance sheet and liquidity

If there is a recession in the near future the company is in decent shape to survive it. It has total long-term debt of ~$5.6 billion, and cash and short-term investments of ~$4 billion, meaning its net debt is only ~$1.6 billion.

OMC cash and short term investments and total long term debtData by YCharts

Its financial debt to EBITDA ratio is ~2.4x, which is not too high, especially considering the company could repay most of its debt with cash and short-term investments.

OMC financial debt to EBITDAData by YCharts

Once the cash and short-term investments are net out, net debt to EBITDA is only ~0.7x, which is slightly higher than the ~0.5x it was a year ago, but still a very safe amount of leverage.

Omnicom Group Credit & Liquidity

Omnicom Group Investor Presentation

The debt is also well-laddered, with most of it maturing between 2024 and 2033, as seen below. Some of the debt is in Euros and Sterling, but most of it is in US dollars.

Omnicom Group Maturity Schedule

Omnicom Group Investor Presentation

economic sensitivity

If a recession were to hit, how much would that affect the company? Unfortunately Omnicom is certainly a company that tends to see its financial performance significantly impacted during recessions. In the graph below the shaded areas are recessions, and as can be seen, revenue growth tends to become quite negative during these periods. In the 2001 recession growth decelerated significantly, and during the financial crisis and Covid pandemic growth posted was worse than negative 15%.

OMC revenueData by YCharts

This impact on revenue naturally affects the share price, which in the past three recessions has meant declines off the high of between 40% and 60%. Shares are currently ~28% off the recent high. We therefore believe they are already discounting either a mild recession, or about a 60% chance of a typical recession in the next couple of years.

OMC price % off highData by YCharts

recession probability

The next question of course is what is the probability of a recession in the next couple of years, in order to decide if Omnicom Group shares have discounted the share price too much or not. If we were to judge the likelihood of a recession by how many people searched “Recession”, we would be convinced that we are either already in one or that one is imminent.

Google Trends Recession Searches

Google trending

Nonetheless, more formal recession probability models are actually giving relatively low numbers. For example, the Estrella and Mishkin model is giving only around a 3.7% recession probability, and a recession does not usually happen unless the model gives a probability above 30%.

ChartData by YCharts

Similarly the yield curve remains relatively steep when using the 10 year to 3 month spread. This yield curve is one of the best at predicting a recession when it inverts, and it still has a good margin before it does so.

10 year - 3 month treasury yield spreadData by YCharts

valuation

Recession fears have driven Omnicom’s valuation to a very low level, with shares currently trading at an EV/EBITDA of less than 7x.

OMC EV to EBITDAData by YCharts

The P/E ratio is also very low, certainly much lower than the 10 year average around 15x. The forward price/earnings ratio is actually below 10x, at only ~9.4x.

OMC PE ratioData by YCharts

This low valuation is also reflected in a very high dividend yield, which is exceeding 4.3%, and a very attractive net common payout yield exceeding 10%. As a reminder, the net common payout yield factors both net share repurchases and the dividend yield.

OMC dividend yield and net common payout yieldData by YCharts

The dividend has been growing nicely over the years, and it has almost tripled from where it stood ten years ago. This is a nice combination of dividend growth and high yield, if an investor is willing to take the recession risk that comes with the shares.

Omnico Group Dividend Growth

Seeking Alpha

risk

The main risk we see in the short term is that of a recession, even if we believe that the market is putting too high a probability on a recession right now.

Omnicom Group tends to suffer disproportionately during recessions, as advertising is one of the easiest expenses for companies to cut-off during hard times. As we’ve seen, the share price does tend to fall off considerably during recessions. Longer-term we see a move towards more digital forms of advertising as a potential challenge too, although the company has been taking steps to prepare for this for some time, and creatives are important for either digital or traditional media.

The short interest is a little high at ~5.4%, but not overly concerned. And we wish the Altman Z-score was a bit higher, but we are not too worried about Omnicom Group surviving a recession.

Omnico Group Risks

Seeking Alpha

Conclusion

Shares of Omnicom Group appear to already be discounting either a mild recession, or a high probability of a regular one.

The share price has already declined more than half of what it typically declines during a recession, even though it is yet unclear whether we are about to experience one. Judging by Google Trends, people certainly appear very worried that one is around the corner, but more sophisticated economic models put the probability relatively low at this point in time. If an investor does not believe a recession is around the corner, or is willing to ride it out, Omnicom Group shares are offering good value at current prices.

You might also like

Leave A Reply

Your email address will not be published.