IPG and Omnicom Downgraded by Deutsche Bank on Layoff News
Deutsche Bank analyst Matt Chesler has downgraded the target share prices of both Omnicom and Interpublic following news of layoffs at both networks. Noting the 3,500 layoffs at Omnicom agencies (see BNET coverage here and here), Chesler wrote in a note to investors:
We … think OMC is acting to adjust its cost structure to be in line with where it is seeing early ’09 organic growth shaping up – suggesting that advertising trends are getting worse in a hurry, and that their outlook for ’09 growth is much lower now.
Chesler also noted something that has been missing thus far from the trade press coverage — that these layoffs will further reduce net income at Omnicom because of the one-time charges associated with severance payments to exiting staff:
We estimate that OMC will record $60-70m of charges in 4Q/1Q, but do not presently account for contingencies in the event of a possible Chrysler bankruptcy or other restructuring.
Worse, Chesler thinks Omnicom has been axed by its clients from almost all their discretionary work:
It is highly likely that most of the $200m or so of project-based work that typically gets done in 4Q did not materialize.
Omnicom is currently trading at the $26 level. Chesler thinks it could still go to $28.
At IPG:
We have lowered our estimates for IPG. We have slightly lowered ‘09 organic growth to -5% in ‘09 (-4% previously) and see margins contracting slightly YoY, not expanding.
… the company expects client spending to be consistent with revised global advertising forecasts published (MAGNA forecast: -0.3% globally, US -4.5%). In our opinion, these expectations may still be too optimistic.
Interestingly, Chesler has not factored in the Reuters report suggesting that IPG was about to do a round of up to 2,000 of its own layoffs. That might help the stock by improving the margins, but would confirm Chesler’s view that CEO Michael Roth has been a bit too sunny about his company’s prospects for 2009.
IPG is currently trading at around $4.10; Chesler thinks it may move to $5.
- See BNET’s Ad Agency Layoff Counter for more details.
Image by Flickr user Jeff McNeill, CC.
Jim Edwards, a former managing editor of Adweek, has covered drug marketing at Brandweek for four years, and is a former Knight-Bagehot fellow at Columbia University's business and journalism schools. Follow him on Twitter or send him an email.
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