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Interpublic Group of Companies, Inc. (IPG): Zacks Rank Buy

Todd Bunton

Investors worried about a slowdown in the U.S. economy late last summer sold off Interpublic Group of Companies, Inc. (NYSE:IPG - News) very heavily, as advertising is one of the more cyclical industries out there.

But the company delivered very strong third quarter results, prompting analysts to raise their estimates for both 2011 and 2012. The share price hasn't fully recovered, however, leading to some compelling valuations.

Interpublic Group of Companies, Inc. is one of the big four global advertising holding companies. It is headquartered in New York and has a market cap of $4.3 billion.

Third Quarter Results

Third quarter earnings per share came in at 16 cents, beating the Zacks Consensus Estimate of 10 cents. This was double the earnings per share in the third quarter of 2010.

Revenue rose 11% to $1.727 billion, ahead of the Zacks Consensus Estimate of $1.649 billion. Organic revenue growth was a stellar 9%, driven by a 10% increase in the U.S.

Operating income surged 73% year-over-year as the company leveraged its selling, general and administrative expenses. The operating margin expanded from 6.5% of revenue to 10.0%.

Estimates Rising

Analysts revised their estimates higher for both 2011 and 2012 off the strong quarter, sending the stock to a Zacks #2 Rank (Buy). The Zacks Consensus Estimate for 2011 is now $0.64, representing 31% EPS growth.

The 2012 consensus estimate is currently $0.77, corresponding with 20% EPS growth.

At a recent industry conference, management at Interpublic stated that it still is not seeing any signs of a major pullback in fourth quarter ad spending. It is also expanding rapidly in the emerging markets of India and China, which should drive strong organic growth for the foreseeable future.

Returning Value to Shareholders

Interpublic continues to return value to shareholders through stock buybacks and dividends. In the third quarter of 2011, the company repurchased 15.0 million shares of its stock, and in August 2011, increased in its share repurchase program from $300 million to $450 million.

The company also pays a dividend that yields 2.6%. The company re-instituted its regular quarterly dividend earlier this year after a 9 year hiatus.

Attractive Valuation

Shares sold off with the overall market in late summer/early fall over fears of another recession in the U.S. When the economic picture improved, the European debt crisis grabbed all of the headlines and kept shares down, despite the nice Q3 'beat and raise'.

This has led to some attractive valuations. Shares trade at just 12.6x 12-month forward earnings, almost a 40% discount to its 10-year median of 20.1x. It sports a PEG ratio of 0.9 based on a reasonable 5-year EPS growth rate of 14.0%.

The Bottom Line

With strong growth projections, rising earnings estimates, a 2.6% dividend yield and attractive valuation, Interpublic offers investors excellent total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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