Deutsche Bank Upgrades Interpublic, But There's Still a Long Haul Ahead

Last Updated Aug 13, 2009 4:13 PM EDT

Deutsche Bank analyst Matt Chesler upgraded Interpublic to "buy" with a price target of $7. Happy days are right around the corner, Chesler argues. IPG is currently trading at around $5.99. Chesler says:
While near-term datapoints are not good and IPG is no quick fix, the precursor to bridging the margin gap (i.e., +tive organic revs) is closer now. At worst we are early, but risk/reward has now improved sufficiently for patient investors seeking an exceptional revenue recovery/margin upside opportunity.
Chesler gives a nod to IPG's past accounting troubles:
We have never doubted that IPG has done much to turn the business around and that it was well on its way to being a "normal" agency. Our concern, rather, was the economy and ad market, which undermined growth necessary for leveraging investments in the business.
Chesler admits that there are risks ahead, especially a weak recovery. That goes doubly true for advertising, where many are saying spend may never get back to the old levels as clients become used to working on the internet (cheap) and with promos (measurable ROI).

IPG has certainly suffered in the hard times. Its Q2 2009 revenues declined 20 percent to $1.5 billion; net income sank 70 percent to $21 million.

Chesler may indeed be early as a bull on IPG. If you look at the revenue yield on every $1 IPG invests in salaries and total operating expenses, there's no clear trend that the network is becoming a more productive business. This chart tells the story:

Despite tons of layoffs, it now only gets $1.52 in revenues for every buck spent on wages. Two years ago it got $1.66. IPG warned of more layoffs in Q3, presumably to deal with that trend.

Image: CEO Michael Roth

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