3 Media Companies to Look For

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The global media industry is expecting to grow at an annual rate of 5%, reaching the $1.3 trillion mark by 2017. With improvements in the global economy in 2013, the industry continues to encounter growth in emerging markets. Specifically, the digital media segment has shown solid growth in the last five years and is expected to rise by 15.1% in 2013, up from $103 billion in 2012. A media company's growth mainly depends on their customer relationships; companies with the aim of building strong relationships with their customers are looking to enhance their global presence by making acquisitions, entering into joint ventures, and focusing on digitization.

I have analyzed three companies from the media industry that are making strategic moves to benefit the most in the growing market. 

Company aiming for inorganic growth 

WPP (NASDAQ: WPPGY), with the aim of expanding its presence in fast-growing emerging markets and for strengthening its digital capabilities, acquired Okam Ltd., the holding company of Salmon Group. Okam will continue to operate as a standalone brand within WPP. It is the leading multinational, e-commerce, digital agency operating from the UK, China, and Australia. It provides digital consulting, design, delivery, and support services to retailers, wholesalers, and manufacturing brand units. Salmon is ranked seventh in “The Drum's Top 100 Digital" list and second in the “Design and Build" list. This acquisition indicates the importance of e-commerce to retailers, manufacturers, and brand owners. E-commerce sales are growing at 10% per annum in the UK market, which will in turn help WPP get benefits from this growing segment. Also, it will widen the company’s offerings in the digital segment and will expand its business internationally. 

WPP also acquired 20% stake in Argentina-based Globant for $70 million in January 2013 to increase its digital capabilities in Latin America, the U.S., and the UK. Globant is an advanced technology service provider targeting to supply innovative software solutions on a digital marketing platform. Globant is more in the emerging technology market, which is growing at a rate of 25% annually, compared to the traditional IT service, which grows at 4.5% annually. The company is generating 90% of sales from Latin America, the U.S., and the UK. Globant also has expertise in providing infrastructural and technical support via digital market promotional activities in a combination of creativity and design skills.

WPP is likely to enhance its revenue from these acquisitions, and they will also increase its digital footprints in Latin America. The company believes that this decade belongs to Latin America, particularly due to the 2014 FIFA World cup in Brazil and the 2016 Olympics in Rio. It is expecting overall revenue of more than $1.6 billion from these events in Latin America. Also, WPP and its associates are anticipating the digital revenue to exceed $6 billion in 2013, which represents over 33% of the group’s total revenue (which was $15.55 billion in 2012). The company has set a target of around 40% of its revenue from the digital segment in the next five years.

Restructuring plan and eyeing emerging markets 

The Interpublic Group of Companies (NYSE: IPG) issued $300 million of 2.25% senior notes that are due in 2017, and another $500 million of 3.75% senior notes that are due in 2023. These notes will be used to repay $200 million worth of higher-interest-bearing, callable, convertible senior notes at which are due in 2023, and 10% senior notes of $600 million that are due in 2017. The company has the right to redeem the 4.75% notes on or after Mar. 15, 2013 at par with the accrued interest, and the 10% notes at a 5% premium on the principal amount with accrued interest on or after July 15, 2013. This combination of new notes and the company's plan for redemption of both the 4.75% convertible notes and the 10% senior notes will help it to improve its debts and reduce its interest expenses.

Mullen Advertisement, an independent brand of The Interpublic Group of Companies, has created the advertisements for automotive brands like BMW and General Motors. Currently it has signed a contract with American Honda Motor to run the advertising campaign of Acura, Honda's luxury brand. In 2011, Honda spent $1.14 billion for its advertising in the U.S. market. This contract is expected to generate revenue of around $200 million to Mullen. It is the biggest contract for Mullen in its 40 year history. To run this advertising campaign, the company plans to open an office in Southern California. Honda is rolling out a number of new products as well which will be coming soon. The launch of new products by Honda will lead Mullen to gain more advertising contracts to promote them in future.

Decent dividend growth 

In the last 10 years, Omnicom (NYSE: OMC) has distributed around 99% of its net income to its shareholders through dividends and share repurchases. It has recently declared the dividend of $0.40 for the second quarter, or $1.60 on an annualized basis which will be payable on July 11, 2013, witnessing a rise of 33.33% year-over-year. In 2012, it increased the dividend to $1.20 per share, compared to $1.00 in 2011. The continuous increase in dividend payout shows that the company is concerned about investor returns. With a strong cash balance of $2.24 billion as of March 2013, it also shows that the company has the capability to continue its dividend payments in future as well.

The joint venture between Omnicom's Goodby Silverstein & Partners and the McCann network group of The Interpublic Group of Companies ended in March 2013. This joint venture was known as “Commonwealth” and was formed to run an advertising campaign for General Motors' Chevrolet brand. Now McCann has taken full ownership of the venture. Omnicom's loss from this split-up is estimated to be around $35 million, reducing its organic growth by 0.2% which will be reflected in the next quarter earnings. However, management is confident in Goodby's abilities to gain new contracts from its customer relationship management network. The company is also optimistic about receiving new contracts of advertisement campaigns from automakers for the promotion of their new model launches.

The company has a strong cash balance of $2.24 billion and is looking for acquisitions in emerging markets to enhance its presence globally. This will help it in gaining new auto advertising contracts in the future.

Conclusion

Looking at the acquisitions done by the WPP, the company is strengthening its digital segment with increasing presence in emerging markets. It is also anticipating a rise in revenue from the FIFA world cup 2014 and Olympics 2016.

IPG's senior note restructuring will reduce the company's interest burden, and the contract from Honda Motors to run the Acura advertising campaign will increase its net margins.

Omnicom, with its strong cash balance, is increasing its dividend payouts and is also optimistic about gaining new auto advertising contracts in the future. The company is also looking to enhance its footprints in emerging markets using some of its cash.

I recommend buying all three stocks.

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Madhu Dube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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