Why margin improvement is a priority for Interpublic

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Margin improvement

Paul Singer’s hedge fund Elliott Management disclosed an activist position in the advertising firm Interpublic Group (IPG). According to unconfirmed sources it’s looking at pushing to sell the company. According to a report in The Wall Street Journal, the activist investor could also urge the company to cut costs and improve its operating margins.

IPG operating margins

Interpublic Group hasn’t emerged from its decade long turnaround

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IPG has been undergoing a turnaround for a decade due to issues arising out of poor integration of acquisitions made in the 1990s. The acquisitions had led to accounting irregularities and the company had to face regulatory investigations and earnings reinstatements for the early 2000s. The stock fell during the period and IPG also saw major client losses and management shakeups. In 2005, current chief executive officer Michael Roth took helm. He has improved the company’s position by sorting out its financial, operational, and accounting issues.

The company said its “financial goals include competitive organic revenue growth and operating margin expansion, which we expect will further strengthen our balance sheet and total liquidity and increase value to our shareholders.” Under Roth, the company’s operating margins have also improved from the negative 2004 levels, but are still lower than that of its main competitors WPP (WPPGF), Publicis (or PUBGY), and Omnicom (OMC). In 2012, the company reported margins of 9.8%, which further fell to 9.3% in 2013, and excluded the $61 million restructuring charge. IPG said, “the primary drivers of this shortfall were a weaker than expected performance in Europe, a limited number of our businesses that saw revenue decreases and couldn’t cut costs commensurately, and investment behind a high level of new business activity.”

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Full year 2013 revenue was $7.12 billion, compared to $6.96 billion in 2012, with an organic revenue increase of 2.8% compared to the same period the previous year. The organic revenue increase was primarily driven by growth in the domestic market, which was a result of net new business with clients won during the year and growth with existing clients. The international organic increase was primarily in the Asia Pacific and Latin America regions, across IPG’s marketing disciplines.

Operating margin forecast below expectations

IPG forecast a 4% organic revenue increase and 10.3% or better operating margin for 2014. Analysts believe the margin expansion has been below expectations because IPG expected to achieve a 13% operating margin in 2014 at its investor day back in 2011. IPG’s 4Q13 earnings release quoted the management as saying that, “We believe our cost actions and other strategic actions will result in at least a 100 basis point improvement over underlying 2013 margin performance. Furthermore, the strength of our balance sheet and our capital return programs have been significant drivers of value creation.”

Interpublic is one of the top four advertising companies in terms of revenue, behind WPP (WPPGF), Omnicom (OMC), and Publicis (or PUBGY). Both IPG and Omnicom are members of the Consumer Discretionary Select Sector SPDR ETF (XLY) and the PowerShares Dynamic Media Portfolio ETF (PBS), which provides exposure to an index of media stocks.

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