Buy Thesis for an Advertising Company (2018)
Omnicom (OMC) is the focus of this Buy Thesis. Omnicom is a holding company for advertising agencies, public relations firms and various other brand management companies. Omnicom is a service provider to national and multinational companies at the largest scale. The brand management services that Omnicom provides are vital to the success of their customers.
Omnicom is an attractive investment because the company is a cash cow with high durability, negative working capital, and shareholder-friendly management.
Important Information about this Investment
Company Name: Omnicom
Stock Ticker: OMC
Buy Thesis Preparation Date: July 28th, 2018
Current stock price: $68.98
My average purchase price: $70.52 (Range: $67.00 – $77.55)
Acquisition Date Range:
01/29/2018 = Purchase price: $77.55
07/24/2018 = Purchase price: $67.00
Position Sizing Goal: 10% of the portfolio (Standard Full Position)
History of my investment in Omnicom
Omnicom came on my investment radar after reading an investment report written by Geoff Gannon and Quan Hoang. If you find that you’re interested in learning more about Omnicom after reading this buy thesis, then I encourage you to read the full report available for free on Geoff’s website.
I was immediately drawn to attractive characteristics of Omnicom’s business model. Omnicom’s ongoing business operations are funded by its customers and not shareholders. This is the negative working capital arrangement that I alluded to at the beginning of this buy thesis. Negative working capital is particularly beneficial to companies if it can be maintained over the long term. Basically, a company with negative working capital can have infinite returns on invested capital because shareholders don’t have to invest ANY capital in the business at all.
Although I found the business quality of Omnicom to be very high, the company was trading at a higher price than it is today. At prices in the high $70 range, Omnicom offered very high certainty of achieving returns of 8-9% per year forever. I decided to buy a very small position at this original purchase price of $77.55.
The initial purchase of Omnicom stock in early 2018
I made this decision in spite of the fact that Omnicom’s expected returns were below my typical 10% rate of return target. My reasoning was two-fold. First, I had a very large amount of my capital in a cash position earlier this year. Between 2016 and 2017, I exited multiple positions as today’s bubble market offered me favorable terms to sell. However, I lacked opportunities to invest my money into new opportunities offering 10% annual returns. This left me with a very high allocation to cash earning returns near 1%. Therefore, I preferred a high probability of 8% returns over certain returns of 1%.
The second reason I invested I purchased Omnicom stock was opportunity cost compared to the market. When Omnicom offered returns of 8-9%, the S&P 500 was offering low returns of 2% or even negative over the next ten years. When I first bought Omnicom at the end of January 2018, the S&P 500 was in the process of peaking after a crazy run. A small position in Omnicom offered a small hedge against further momentum gains in the S&P 500 while I remained mostly in cash.
Current Rational for building a large Omnicom Stock Position
Instead of explaining my estimate of Omnicom’s intrinsic value, I will break down the reasoning behind my target purchase price. My target purchase price is driven less by a precise estimate of intrinsic value, and more by a broad understanding of the future return proposition for Omnicom at this price.
I recently acquired Omnicom stock at