Morgan Stanley Upgrades Interpublic Group To Overweight

• Interpublic Group of Companies Inc IPG shares are down 3 percent in the last 5 trading days, and are trading almost flat since November 18.
• Morgan Stanley’s Benjamin Swinburne upgraded the rating on the company to Overweight, with a price target of $27.
• Underlying growth and new business at Interpublic Group’s agencies create an opportunity for investors, Swinburne stated.

Interpublic Group’s shares “have room to run,” analyst Benjamin Swinburne wrote. While changes in consumer behavior and the impact of technology on marketing have adversely impacted growth and caused higher uncertainty across media, advertising agencies seem to be “navigating it better.”

Swinburne added that Interpublic Group has unique growth potential heading into 2016. He enumerated the reasons for the Overweight rating as:

1. Agency organic revenue growth exceeding that of underlying national TV
2. Interpublic Group’s strong performance in 2015, with the media review bubble allowing the company to generate higher top line than its peer group and consensus
3. Unique operating leverage, which should support the company to achieve an EBIT CAGR of around 10 percent in 2015-2017

In the report Morgan Stanley noted, “The organic revenue growth estimate for 2016 has been raised from 4.2 percent to 5 percent, reflecting 150 bps in revenue tailwinds from net new media business wins year-t-date. The benefit from these wins will build through the year, as we expect a 2 quarter lag from winning to seeing the top line benefit.”

Swinburne further commented that the consensus organic revenue growth expectation, which is currently at 4-4.2 percent, should be sufficient to support Interpublic Group’s shares, and prove to be conservative.

The analyst expects the company to achieve ~25-30 percent incremental margins, translating to about 80bp of margin expansion, “as it continues to narrow its gap versus peers.”