NEW YORK Merrill Lynch on Thursday downgraded its rating of Interpublic Group's stock to "sell" from "neutral" with a high risk of volatility, while Bear Stearns maintained its "peer perform" outlook. Analysts from both firms, however, agreed that account losses such as Bank of America and General Motors' media duties raise questions about IPG's stability as it prepares to report long overdue financial results.
Merrill Lynch's downgrade comes three weeks before IPG is expected to report finances for 2004 and the first two quarters of 2005. The numbers have been delayed by newly discovered accounting problems and IPG's protracted attempts to get its financial controls in line with federal reporting standards. The No. 3 agency holding company also is dealing with the overhang of a two-year-old investigation of its accounting by the Securities and Exchange Commission.
"While typically we would not expect holding company issues to cloud a client's perspective on its agency partner, in the case of Interpublic the lack of financial information has persisted for long enough that perhaps clients with a large presence—particularly across a holding company—may be taking a hard look at the implications of their relationship," wrote Alexia Quadrani, a research analyst at Bear Stearns in New York. "A more indirect symptom of these problems could be the low morale of employees (given the stock price and bad press), as well as distracted senior management that is focused on fixing these financial problems."
Given losses such as BofA last week and GM media in May, Merrill Lynch research analyst Lauren Rich Fine said, "We do not view this as a classic restructuring story, as revenues need to stabilize, which does not seem imminent." Fine added that "we continue to maintain that the financial repercussions of the GM media buying loss were greater than management indicated."
Sources pegged revenue on the global GM media business at $45-50 million, while revenue on BofA, which last week said it would shift its marketing services business to units of Omnicom Group, is estimated at $65 million.
Fine also doesn't view IPG as a prime acquisition target. "While there has been speculation that IPG would be a good leveraged buyout candidate, we have trouble arriving at enough upside to offset the potential risks created by an SEC review and diminution of brand equity," Fine wrote. "Further, we are not certain that financing could be arranged in view of the recent account losses."
By early afternoon, IPG's share price was down slightly from Wednesday's close of $11.77, on below average trading volume of more than 1.1 million, according to Yahoo Finance. The company's average trading volume is 2.2 million.
This story updates an item posted earlier today with Bear Stearns' outlook on IPG.