Omnicom Q2 Preview; Guidance Upgrade On The Cards

Profile: Baa1/BBB+

• Omnicom reports Q2 results tomorrow after the close; BBG consensus only has ~5 estimates for most metrics but is looking for revenue +6% YoY (w/ +4.5% organic) with op income +4% and an operating margin of just under 15%. Just two FCF estimates on BBG for +4.4% and +5%.
• Q1 results were strong; revenue +5% YoY, Op Profit +3% YoY, FY org growth guidance raised from 3.5-5% to 4-5%. Leverage increased from 0.5x at FY23 to 1.3x on the Flywheel acquisition while FCF was broadly stable. BBG consensus (albeit again with a lower number of estimates) already sits in the upper half of the new FY org growth guidance range as markets consider an increase in the upper end of the guidance range to complement the lower end increase at Q1.
• As of February, Moody’s saw leverage falling from 3x to 2.8x this year and expected it to remain in the 2.5-3x range from there against thresholds of comfortably below 2.5x or above 3x. FCF to debt was seen at 10% in 2024 against thresholds of 15% and 10%. While this places the metrics quite close to downside triggers, the decision to reduce payouts indicates consideration of the BS balance sheet and protection of the credit rating.
• Sentiment around the name is bullish as advertising budgets are restored, bolstering expectations around a guidance upgrade. The Olympics and US elections should support revenues as will the rollout of the Flywheel as part of Precision Marketing pitches – Omnicom already claim that Flywheel has already played a key role in it’s pitch for Amazon’s business. In June they announced that VW, one of the worlds largest advertisers, renewed their contract, which had presented a risk scenario, while there are no other major renewals scheduled for this year. Omnicom recently also won a CRM contract with GM, building on their BMW contract win late last year.
• Despite the seemingly strong news flow, equity has underperformed the S&P 500 Media/Ent sub-index since Q1 results at +3% vs. +11% and credit spreads have performed broadly in line with peers with the new 32s sitting flat to where they were issued in Feb despite what we saw as a 20-25bp NIC.
• The EUR 32s screen as cheap on the curve, offering close to 50bps of pickup over the 31s for an eight-month extension though the 31s do trade with a cash price just under EUR 89 while the 32s are at par. That said, the Omnicom curve seems like it should trend more towards the flatter Publicis curve than steeper peer curves.