Ad firm Interpublic Group completing its turnaround
Question: I’ve been studying companies that I might invest in. Can the stock of the Interpublic Group of Cos. continue to do well?
Answer: While the economy inevitably plays a role in this advertising and marketing company’s profits, the need to project a positive image remains important worldwide.
This global company controls communication agencies in more than 100 countries. That includes some of the field’s best, such as McCann Worldgroup, Draft FCB Group, Lowe Worldwide, Golin Harris, Magna Global and Deutsch.
After overly aggressive acquisitions in the 1990s, with the serious accounting problems and weak revenue growth that followed, Interpublic Group restructured and appears to be completing its turnaround.
Shares of Interpublic Group (IPG) are up about 35% since Jan. 1, following last year’s 86% gain. It posted a fivefold increase in second-quarter profits to $105.3 million, thanks to strong results from emerging international markets and a broad range of industry sectors.
Nonetheless, Interpublic must cope with pricing pressure on its fees, high expectations of major clients, ever-evolving technological changes throughout the communication industry and the fact that it has lagged behind its peers in profitability.
The consensus analyst opinion on the stock of Interpublic is “buy,” according to Thomson Reuters, consisting of four “strong buys,” nine “buys” and three “holds.” The firm is in good financial health and benefits from offering a wide array of services.
International growth is expected to become a major driver of profit, since mature markets such as the U.S. and Europe are fairly saturated. Most recently, Interpublic’s media buying arm has been in talks to buy or form a partnership in China with online advertising firms for digital ad-buying units there. China’s Internet population now ranks as the largest in the world.
Michael Roth, the former chief executive of MONY who has been Interpublic’s top executive since 2004, has put special emphasis on improving the productivity of its business units. Growth is expected to be conservatively generated internally, rather than through rapid acquisitions as in the past.
Interpublic’s earnings are expected to increase 121% in 2010 and 33% next year. The five-year annualized return is projected to be 17%.
Question: My American Funds Fundamental Investors shares were bought years ago because the fund seemed large and conservative. What’s your opinion of it now?
Answer: Large it is, with $42 billion in assets run by five experienced portfolio managers who focus on big companies.
American Funds Fundamental Investors “A” (ANCFX) is up about 10% over the last 12 months and had a three-year annualized decline of 6%. Both results rank in the upper one-third of large growth and value funds.
Extremely large funds are sometimes worrisome because their size makes it difficult to make portfolio moves nimbly. Yet American Funds has a good track record of effectively running mammoth funds and never closing funds to new investors simply because assets have grown significantly.
“This is a core holding with very well-known companies that the managers consider reasonably priced,” said John Coumarianos, senior mutual fund analyst with Morningstar Inc. in Chicago, who notes that its 18% holding in foreign stocks means it may be unable to fully join in when the domestic market is booming. “While the stocks in its portfolio don’t have any ‘screaming’ problems to deal with, they won’t be ‘screaming’ growers in price, either.”
The five fund managers are evaluated and compensated based on rolling four-year periods rather than short-term results. Two managers have at least $1 million of their own money in the fund, and the remaining three have more than $1 million in the various American funds they oversee. This personal financial commitment increases the likelihood they have shareholder interests in mind.
The managers seek undervalued or overlooked firms with solid long-term growth potential. Turnover is usually low and they pick up depressed growth stocks from time to time.
American Funds Fundamental Investors owns stock in nearly 200 companies. Industrial materials is its largest concentration at 16% of assets, with other groupings in healthcare, energy and financial services. Top holdings recently were Merck, Suncor Energy, Oracle, McDonald’s, Microsoft, JPMorgan Chase, Apple, Home Depot, Verizon Wireless and Medtronic.
This 5.75% “load” (sales charge) fund requires a reasonable annual expense ratio of 0.69%.
Andrew Leckey answers questions only through the column. E-mail him at yourmoney@tribune.com.
