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Editor's Note: Below is a flashback from Hedgeye Communications analyst Andrew Freedman's short Omnicom (OMC) research call. Freedman added OMC to the top of his short bench on 7/14/21 during his "2H21 Communications Themes Call." Following a disappointing earnings call today, OMC has fallen over -4.5%. Below is updated analysis following the earnings call, as well as key takeaways on why Freedman went short the stock last week. For more info on Communications Pro research click HERE. |
FROM FREEDMAN:
OMC reported earnings this morning.
As a reminder, we added the advertising agency holding companies to the top of the short bench last week and discussed during our themes call.
The agency model is secularly challenged; plagued by in-sourcing, fee compression, high labor intensity and fierce competition. We believe relaxed remote work policies post-COVID will accelerate in-sourcing trends on the brand side.
Additionally, while it seemed like a prudent move to lay off/furlough staff and institute pay cuts during COVID.
In the long-term, it is quite possible the agencies accelerated their own demise. With economic activity roaring back, many agencies are understaffed – and we believe margins will come under pressure over the next 6-12 months as they have to ramp back hiring to meet demand (right into a slowdown in advertising spend) and likely have to pay higher wages (inflation) to attract/keep talent.
From a quad/style factor perspective, the agencies make great #Quad3 shorts.
As expected, OMC had a great Q2 with accelerating revenue growth and improved margins. However, this is as good as it gets and our top two takeaways from the call were:
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“Looking forward, we expect to continue to see positive organic growth as client spend increases, albeit at a slower pace than we experienced in Q2. Our management teams are continuing to align costs with our revenues as markets reopen around the world.” “Many of our companies are hiring staff to service an increase in client spend and the new business wins. And we are seeing some pressure on our staff costs, particularly in the U.S., as the labor markets remain tight.” |
Then, we got news that the NFL is insourcing a large part of their ad buying business, which is a loss for OMC. NFL’s estimated ad-budget is $200M per year.
For more info on Communications Pro research click HERE.
