IPG Loss Is Stock Price’s Gain

After Interpublic Group posted its largest quarterly loss ever, its shares jumped 22 percent in unusually heavy trading at the market’s open last Wednesday. By day’s end, IPG shares had closed up 20 percent, at $29.14, with over 10 million shares changing hands—more than five times normal trading volume.

On the surface, IPG’s third-quarter earnings contained little to trig ger such exuberance. The com pany waited until after the closing bell Tuesday to disclose a loss of $477.5 million, or $1.29 a share. Worldwide reve nue fell 7.4 percent to $1.6 billion; organic rev enue dropped 8.5 percent. Restructuring costs for the quarter were $592.8 million, $100 million higher than IPG had previously indicated.

IPG’s three-week delay in releasing earnings may have had analysts bracing for the worst. Instead, heavy cost controls and some positive nuggets mined from the depths of the detailed report likely helped attract buyers to the undervalued stock. (As recently as Oct. 2, the stock had skidded to a 52-week low of $18.25.)

William Blair, an analyst at Troy Mastin, said IPG’s stock has been valued at 35-40 percent below that of its peers. “That set the stage for a price move,” he said, also citing progress in cost controls.

Cost-cutting initiatives totaled $592.8 million, exceeding earlier estimates because of continuing revenue weakness, which caused higher severance, lease terminations and other merger-related costs.

Other investment houses saw IPG’s prospects improving as well. Morgan Stanley and Salomon Smith Barney both upgraded their recommendations on the stock last week.

Wall Street had already factored in a big hit against profits. “There was nothing that really surprised anyone,” noted Kevin Sullivan, a Leh man Bros. analyst. “The big loss … is shocking to an outsider, but it was known by the Street.”

Plus, there was some positive news. Earnings before restructuring costs and one-time charges were 15 cents a share, ahead of Wall Street estimates of 13 cents. Many analysts were surprised by IPG’s new-business gains, which grew 6 percent to $771.7 million, with wins that included Sirius Satellite Radio, Circuit City, Pfizer/Pharmacia and UPS. And restructuring costs have finally been paid down, IPG reiterated, with an nual cost savings of $300 million.

IPG also restated its commitment to grow revenue by 15 percent next year, and to increase earnings by two points for each point of revenue growth. Even if revenue is flat in 2002, IPG insisted, growth will come through cost cutting.

But while aggressive cost cutting has helped shore up margins, there will be no substitute for revenue gains going forward. “The write-offs make it possible for the analysts and the market to say, ‘Hey, they cut what they needed to take the hit, and even if there isn’t a lot of organic growth, they will still make their mar gins.’ So, in that sense, it’s a positive,” said one IPG agency executive. “What’s not [positive] is that everyone will be less forgiving if they don’t make those margins, because [IPG] won’t have the ability to turn to more cost cutting.”

In no small measure, Wall Street’s enthusiasm reflected the quantity of information IPG provided. Previous reports have been widely criticized as less than forth coming. During Tuesday’s conference call, conducted by CEO John Dooner and CFO Sean Orr, analysts and investors gushed over IPG’s detailed and thorough disclosure. The two executives also came across as more direct.

The freshman team of Dooner and Orr appeared to take heed from ear lier experiences with analysts. After lowering estimates one too many times, they declined to forecast results and were markedly cautious in commenting on near-term revenue.

It was the cloudy revenue picture that emerged as Wall Street’s chief concern. While analysts were willing to cut IPG some slack given general industry conditions and the aftermath of Sept. 11, they pressed Dooner and Orr to explain why IPG is an underperformer in its peer group.

Analysts also voiced concerns about ongoing structural changes at Lowe Lintas & Partners. Dooner described the agency as being “in the early stages of change,” following the arrival this summer of the shop’s CEO Jerry Judge and U.S. CEO Paul Hammersley from London. As for difficulties involving the integration of Foote, Cone & Belding and the subsequent loss of AT&T and Pepsi bus iness, Dooner acknowledged the agency has “had a couple of bites,” but said it also has “a couple of very exciting things in the pipeline.”

Another concern, the impact on IPG’s Initiative Media should it lose shaky cornerstone client Disney, was downplayed. “You’re talking about something with less than $10 million in revenue,” said Orr.

Few analysts seemed concerned about IPG’s debt level, which rose to $3.1 billion as of Sept. 30, compared with $2.1 billion at year’s end. Nor did last week’s credit-rating downgrade by Moody’s Investors Service cause alarm.

“We have no issue with their debt,” said Neil Carter of ABN Amro, London. “They’re at the same rating now as WPP”—a point underscored by Orr during the phone conference.

The company said that in the near term it will use free cash flow to pay down debt rather than to make acquisitions or repurchase shares.

At week’s end, IPG’s stock closed down slightly, at $27.98. Despite dodg ing a bullet last week, the company is not yet out of the woods.