What happened
Shares of Interpublic Group (NYSE: IPG) tumbled by 12.5% through 12:01 p.m. ET on Friday, despite the advertising giant delivering second-quarter numbers that beat analysts' consensus predictions for both revenues and earnings. The stock was weighed down in part by management's assessment of the advertising market as still looking pretty weak.
Analysts had forecast Interpublic would earn an adjusted profit of just $0.60 per share on sales of $2.4 billion in Q2. In fact, Interpublic earned $0.74 per share (adjusted), while its sales approached $2.7 billion.
So what
Revenue at Interpublic declined by about 2% year over year in Q2, and operating profits fell by 11%. Net income was weaker than the adjusted figure -- $0.68 per share. On the plus side, however, it was up a strong 17% year over year.
That sounds like the type of news that should have driven Interpublic Group shares higher on Friday -- all the more so considering that management actually raised its guidance for the rest of this year. "Given our first six months, we are revising our full-year organic growth expectation to 1% to 2%," the company said in the earnings release, and predicted widening profit margins to boot.
Problem is, even a 2% increase in revenues (which would work out to perhaps $9.6 billion in revenue this year) would fall short of Wall Street's expectations for a strengthening ad market in 2023. Analysts were hoping Interpublic would promise sales in excess of $9.7 billion this year -- and in that, they were disappointed.
Now what
So where does this leave investors? Based on their expectations of stronger growth than Interpublic is promising, Wall Street analysts were hoping the company might earn as much as $2.92 per share this year -- 6% year-over-year growth. If Interpublic is going to fall short on revenues, though, this implies it might fall short on earnings as well.
Yet even so, even if Interpublic under-earns by, say 10% below expectations, the stock would only be trading for about 12 times current year earnings. In a reviving ad market, with profit margins improving, that doesn't seem like a very high price to pay for a dominant company in its industry, and one paying a generous 3% dividend yield to boot.
While Friday's sell-off is certainly discouraging, I think in the end, investors in this company are going to do just fine.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
