Omnicom Predicts Better Days Ahead

Omnicom Group (OMC 0.48%) announced a mixed quarter on Thursday morning, highlighting the impact of less predictable seasonal project work on its end-of-year results. But that's not to say the public relations and marketing specialist is disappointed with its position today, To the contrary, management followed with an optimistic view of the year ahead.

Still, with shares down almost 7% in response, let's take a closer look at what drove Omnicom as it finished the year, as well as what investors can expect from the company in the coming months.

IMAGE SOURCE: OMNICOM.

Omnicom Group results: The raw numbers

DATA SOURCE: OMNICOM GROUP.

What happened with Omnicom Group this quarter?

• Earnings included a $0.46-per-share charge related to recent U.S. tax reform. Adjusted for that item, earnings were $1.55 per share, up from $1.47 in the same year-ago period (and slightly above expectations for $1.54).
• However, the top line arrived below expectations for revenue of $4.21 billion.
• Keep in mind Omnicom doesn't provide specific financial guidance. But management did warn last quarter that visibility tends to be limited in Q4 due to a seasonal increase in less predictable project work. 
• The change in revenue included 1.6% organic growth, a 5.5% drop in acquisition revenue (net of dispositions), and a 2.4% negative impact from foreign exchange.
• On a geographic basis, organic revenue grew 8.2% in Euro Markets and Other Europe, 6% in Asia Pacific, and 1.9% in the Middle East and Africa. Organic revenue dipped 0.8% in North America, 0.7% in the U.K., and 0.3% in Latin America.
• Quarterly EBITDA grew 2.5% year over year to $647.1 million.
• Omnicom Health Group acquired Snow Companies, a direct-to-patient communications and research specialist for major pharmaceutical and biotech companies around the globe.

What management had to say

During the subsequent conference call, CEO John Wren noted that Omnicom's 1.6% organic growth was indeed below the company's internal expectations. For that, he blamed the above-mentioned project work that tends to be "concentrated in the U.S., and [...] based on the individual client circumstances and general economic conditions."

But Wren also elaborated on the positive implications of tax reform for the long term:

In the fourth quarter 2017, our agencies only saw a partial benefit from this year-end project spend, which has historically been in the range of $200 million to $250 million. Looking toward 2018, the effects of the 2017 Tax Act and the stimulus from the recent budget deal should have a positive impact on consumer spending in the United States. We're optimistic we will see some of those benefits in the second half of 2018. Outside the U.S., the global economy appears to be in the best shape since the great recession.

Looking forward

As usual, Omnicom declined to provide specific quarterly guidance. But CFO Philip Angelastro did predict that foreign currencies could positively impact revenue by 3% to 4% in the first quarter, assuming exchange rates remain consistent. The impact of acquisitions, net of dispositions, should simultaneously reduce revenue by roughly 4% to 4.5% in Q1 before returning to a narrower range of plus or minus 1% for the rest of 2018. Moving forward, Omnicom will continue to evaluate the effectiveness of its portfolio of agencies, making further dispositions or strategic acquisitions as it sees fit.

In the end, apart from Omnicom's underwhelming organic growth this quarter, this report contained no significant negative surprises that should merit investors fleeing for the exits. To be fair, though, Omnicom stock had bounced nearly 30% from its 52-week low set in November in the weeks leading up to this report. So it's equally unsurprising to see some taking profits off the table today.