The advertising world is picking itself up after getting slammed by the recession. In particular, Interpublic Group (NYSE: IPG), the heavyweight international advertising conglomerate, took a one-two combo that left it reeling. The aftermath of the dot-com bust left the company in a money-losing fog long after the economy had recovered. Then, just as it was finally getting back into the black, the recession and financial crisis knocked it back on its heels once again. Only after its automotive and financial-services clients began to recover did Interpublic show signs of life.
It's alive!
The company might not have survived its recent perils if it didn't have enough cash on hand. As fellow Fool Jim Royal has observed in looking at his Cash King metric, Interpublic has made steady progress over the past five years in generating the hard cash it needs, bringing its free cash flow-to-revenue ratio back in line with major competitors WPP (Nasdaq: WPPGY) and Omnicom (NYSE: OMC).
After an encouraging 2010, during which net income almost doubled, the company, eager to show off its renewed vigor, used $480 million to reduce debt and buy back a substantial portion of its convertible preferred stock. The board of directors has also authorized a buyback of common shares of up to $300 million. On top of that, Interpublic has declared a quarterly dividend of $0.06 per share, its first dividend since 2002.
This change in Interpublic's bottom line couldn't have come without a stirring in the economy. As is usually the case in an economic downturn, advertising is one of the first industries to feel the pain -- and one of the last to receive the benefits of a recovery. Ad agencies are so closely connected to their clients' fortunes that if the Geico Gecko sneezes, handkerchiefs come out of every Interpublic executive's pocket. (Geico is a client of the Martin Agency, which is an Interpublic company.) The top 10 Interpublic clients accounted for 24% of the company's 2010 revenue. Imagine just how seriously Interpublic takes any little tremor that may affect those clients.
To buy or not to buy?
Investors who bought Interpublic at their November 2008 lows have seen their shares more than quadruple in value. But because the fortunes of the advertising world -- especially those of the mega-agencies -- are so linked to the economic climate, a bet on Interpublic is not only a matter of faith in the company; it's also a bet on many other factors that bear on the economy.
Another concern I have, not only with Interpublic but with its rivals as well, is its insatiable appetite for acquisitions. Since 2008, the company has completed 17 acquisitions. Interpublic now has 85 companies listed on its website. That's a big stable of companies to keep track of -- but for now, Interpublic is doing so profitably.
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