Omnicom Earnings: Advertising Is Strengthening, AI May Accelerate Weak Consulting Growth

We are maintaining our $95 fair value estimate of narrow-moat Omnicom OMC. The firm’s second-quarter results indicate the strengthening of ad spending, which is consistent with our expectations. In addition, we commend Omnicom for aggressively investing in artificial intelligence and partnering with hyperscalers that we think are at the forefront of continuing progression in AI. We did not make significant adjustments to our projections as management slightly increased the low end of its full-year organic growth outlook while maintaining its margin guidance. In our opinion, Omnicom is fairly valued. We view narrow-moat peer WPP, which at current levels has a dividend yield above 4%, as a more attractive investment.

Total revenue came in at $3.61 billion, up 1.2% from last year. Organic growth of 3.4% was partially offset by a foreign exchange headwind and decline from dispositions. We were pleased with the 5.1% growth in advertising and media revenue, as less uncertainty in the macroeconomic environment is likely to increase the confidence of advertisers, resulting in more media buying. While precision marketing increased 2.3%, it was a significant deceleration from the previous quarter’s 7% growth, as demand for consulting and digital transformation has weakened a bit. However, with increasing interest in artificial intelligence—which requires further digital investments and enhancements—precision marketing growth could strengthen a bit in the second half. Experiential revenue increased 9.2%, helped by events mainly in Europe. We were pleased with continuing growth in commerce and brand consulting (2.4%), which we think could drive higher demand for both the media and creative services in the future. Healthcare increased 3% from last year, while revenue from public relations services was up only 0.1%, given the stronger comparison with last year’s midterm election.