JPMorgan Maintains Buy on IPG

JPMorgan is sticking with their Buy rating on the shares of Interpublic Group (IPG) ahead of the company’s earnings on February 27th. They are expecting EPS of $0.31, which is two cents ahead of consensus, due to flat organic revenue growth (a positive) and margin improvement. The shares are trading at a surprisingly low 2.7x ’09 EBITDA, which is less than half the trading multiple of its peers.

From Analyst Alexia S. Quadrani:
As Omnicom demonstrated in its better than expected Q4 results, the advertising and marketing services businesses are somewhat protected from the weak ad market due to the very diversified revenues stream (both by service offering and geography) and variable cost structure. Omnicom's CRM (direct marketing) business grew 3% in Q4 and we would expect to see similar positive revenue growth from IPG's marketing services business in Q4.

Internal improvement likely to be a helpful tailwind. We believe IPG has the added benefit of many internal changes made throughout the year, which should provide an additional tailwind and likely continue its trend seen through the first nine months of 2008 of delivering the best organic revenue growth of the group. Specifically, with its agency Lowe now in the black (after losing $70 million in 07) and leading media agency Initiative making a huge turnaround (named by Adweek US media agency of the year with an estimated increase in 2008 revenues of 22%) we believe IPG has a lot of internal firepower to offset this very challenging overall ad marketplace near term.

Liquidity concerns seem unwarranted. With ~$417M of net debt (includes $1.7B of cash at Q3) and near-term limited maturities ($250M in 11/09 and $250M in 11/10) which can be funded from FCF, we see little reason to be concerned about liquidity, particularly as the ELF (which expires this year) is pre-funded and IPG has nothing drawn on its new $335M facility.

Valuation is compelling as IPG is the cheapest stock in our advertising and marketing services group. At 2.7x 09 EBTIDA, we believe IPG shares are significantly undervalued, trading at a trough multiple and well below its peers (6.2x 09 EBTIDA). IPG even trades at a discount to more secularly challenged, slower growth companies with real longer term liquidity concerns, such as NYT and GCI. We look for relatively positive results from other advertising and marketing services companies (Publicis reports later this week) and good results from IPG on the 27th as a catalyst for shares.