Omnicom Intrinsic Value Analysis (OMC)
This intrinsic value report for Omnicom (OMC) is a membership-only benefit for Patrons of DIYInvesting. This intrinsic value calculation uses data most recently updated on April 10th, 2019. I completed the calculation on April 19th, 2019.
Intrinsic Value Analysis Methodology
Omnicom is a holding company for advertising agencies, public relations firms and various other brand management companies. As previously discussed, Omnicom is an “Excellent” quality company due to being a cash cow with high durability, negative working capital, and shareholder-friendly management.
I will calculate Omnicom’s intrinsic value using the following multi-step process:
Outline assumptions I am making about Omnicom’s business performance
Determine the starting Owner’s Earnings Yield necessary to earn a 10% rate of return on investment in Omnicom stock
Convert this Earnings Yield into a Price to Sales ratio that can be used to quickly determine Omnicom’s Intrinsic Value
Calculate Omnicom’s Current Intrinsic Value per Share
Key Assumptions for Omnicom’s Valuation
2018 Full Year Revenue = $15,290.2 million
Shares Outstanding = 220,167,610 (as of April 10th, 2019)
Omnicom is a cannibal (i.e. They are constantly repurchasing shares and reducing the number of shares outstanding.)
Operating Margins (EBIT) of approximately 13% (with ~1% standard deviation)
Estimated effective income tax rate: 27.4%
Estimated Interest Expense Margin: 9%
Owner’s Earnings and Free Cash Flow available for Dividends and Share Repurchases reliably exceeds Net Income (From 2009 through March 31st, 2019, Omnicom was able to distribute 105% of it’s Net Income to shareholders)
A long-term growth rate of 4% slightly lagging nominal GDP growth of 5%
A long-term share dilution rate of 1.5% per year due to share-based compensation
References: Omnicom’s 2019 10k report, Omnicom’s Investor Presentation, and the Avid Hog data report.
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Step 2: Calculating Earnings Yield
A fairly simple formula can be used to estimate future stock performance over very long periods of time. This is accomplished by treating the holding period as ‘forever’ and excluding any sell contribution to the return.
Nominal Investment return = Starting Earnings Yield + Nominal Growth – Share Dilution
Omnicom’s Long-Term Growth Rate
Omnicom’s nominal growth should be in line with nominal GDP growth. Omnicom is a large mature business and any long-term estimate cannot assume that Omnicom’s growth will exceed GDP growth. 5% nominal GDP growth is a conservative estimate for the global environment in which Omnicom operates. The embedded assumption here is that advertising spending growth will match nominal GDP growth. I believe this is a reasonable assumption.
However, Omnicom’s management only expects 4% nominal long-term growth for Omnicom’s business. They outlined this number in both the 2018 and 2017 10k regulatory documents. Page 11 of the 2018 10k, shows this 4% growth rate assumptions.
Omnicom’s Long-Term Share Dilution Rate
Share dilution is estimated at 1.5% per year. The underlying data is based upon Omnicom’s annual reports and the conservative assumption is borrowed to simply match Gannon’s Avid Hog report.