Things Could Get Worse Before They Get Better For Interpublic Group, Macquarie Downgrades

Interpublic Group of Companies Inc IPG recently guided down on 2017.

The Analyst

Macquarie's Tim Nollen downgraded Interpublic Group of Companies from Neutral to Underperform and decreased his price target for the stock from $21 to $18.50.

The Thesis

The consensus estimates of 2.5 percent organic revenue growth and 11 percent 2018 EPS growth is too high, Nollen said in a note. He estimates 1.2 percent top line growth as revenue pressures may continue in 2018 and 7 percent bottom line growth. The company is going to benefit from tax reform, but it looks like the benefits are already reflected in the stock price.

Nollen expects that the reduction in consumer packaged goods agency and media spend could ease from here, but there's a risk that the problem could repeat in other sectors undergoing structural change. He explained that this means both reduced advertising spending and fee pressure for Interpublic Group of Companies. The Amazon.com, Inc. AMZN account should help the revenue growth, but the Microsoft Corp MSFT account review opens new risk.

The stock trades at the top of the peer group at 14 times 2018E price to earnings, but well below historical market premium, said Nollen. He reduced his 2018E EPS from $1.56 to $1.49 before tax reform effects. With lower taxes EPS could rise to $1.65-$1.70.

The Price Action

Interpublic Group of Companies trades lost around 12 percent, adjusted for dividends, since Jan. 3, 2017.