Morgan Stanley Says You Should Be Selling Omnicom

Swinburne, Ripps and Luan lowered estimates for both companies on deceleration in organic growth, which is driven by pressure in key advertising verticals, like retail and CPG. The analysts believe current analyst consensus estimates for organic growth are too high, adding that year-over-year organic growth is already negative in the U.S. market. The analysts are also skeptical about margin expansion, which seems to be the consensus on the Street.

Morgan Stanley analysts said the business model for agencies is not broken, but its organic growth could be limited because new competition may be emerging. Accenture Plc ACN and International Business Machines Corp. IBM could attempt to capture a part of this market.

Swinburne decided to downgrade Omnicom Group because his earnings outlook is lower than consensus and the stock trades at a premium to its peers. He didn't make any material changes to EPS, because a fairly variable cost structure and FX tailwinds could compensate for slower organic growth.

The $72 price target for Omnicom Group implies a forward price-to-earnings multiple of 12 and a forward EV/EBITDA of 7.5. In a bullish scenario, Swinburne sees a potential price target of $92, which he sees possible if the company manages to achieve a growth of 2.5 to 3 percent. In case of even slower growth, the analysts see a price target of $52 as adequate.