Philippine Markets Newsletter

Being a jack of all trades and a master of one enabled this advertising behemoth to earn Uniform ROAs that are 100x as-reported

August 19, 2021

Mass marketing is an undifferentiated advertising strategy that aims to appeal to the highest number of potential customers possible. It’s often employed by companies with enough scale and resources to pull it off.

This advertising agency has that, owning over 1,500 smaller agencies globally that it has accumulated through acquisitions. In doing so, it was able to use a mass market model, offering its services to corporations from all types of industries, size, and geographic presence.

However, while the strategy of mass acquisitions to be able to service and appeal to a wider market has not translated to higher as-reported returns, Uniform Accounting would argue otherwise, with this company earning Uniform ROAs that are 100x greater than as-reported.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Thursday Uniform Earnings Tearsheets – Global Focus
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Lefty’s is a small store based in San Francisco, California that sells miscellaneous school, office and kitchen supplies for left-handed people—it’s the only store in the U.S. that specializes in those products.

Only about 10% of the world’s population are left-handed, and likely an even smaller percentage of that lives in San Francisco. This means that Lefty’s is serving an incredibly niche market.

There are larger companies that do the same.

Sage Therapeutics, a biopharmaceutical company, specializes in research for central nervous system disorders. Blue Bird Corporation, a company we’ve written about before, specializes in the manufacturing and sale of school buses.

Niche marketing is similar to picking a major in college. You can choose to graduate with as many bachelor’s degrees as you want, but that would take a lot of time and money. So, we often only focus on one degree and specialize in that.

Similarly, it’s sometimes more strategic to pursue and dominate a niche market, especially for companies without the scale or means to pursue other target markets.

On the other hand, those that do have scalable businesses or more resources can use a mass market model. This model is the complete opposite of a niche market model where, instead of a unique target market, the business targets the general market regardless of its attributes.

The Omnicom Group (OMC) uses this type of model, and it is able to do so thanks to years of industry consolidation.

Omnicom is the second-largest advertising firm in the world, employing about 64,000 people worldwide and operating more than 1,500 individual agencies domestically and internationally under five brands: BBDO Worldwide, Diversified Agency Services, DDB Worldwide, Omnicom Media Group, and TBWA Worldwide.

The company provides services relating to customer relationship management, public relations, and of course, advertising, with clients of all industries, corporation size, and geographic presence.

To build this large of a scale and market reach, Omnicom continuously bought smaller agencies to add to its portfolio.

The agencies keep their individual skills and continue operating as they would have otherwise, but the parent company—in this case, Omnicom—gains a huge edge from this strategy.

However, this strategy of mass acquisitions to be able to service and appeal to a wider market doesn’t seem to translate to higher returns based on as-reported metrics.

Specifically, as-reported return on assets (ROAs) have only ranged from 4%-6% over the last sixteen years, which is below corporate average levels.

Uniform Accounting, on the other hand, paints a more accurate picture of Omnicom’s profitability.

Returns have actually been significantly stronger, with Uniform ROAs that have steadily increased from 37% in 2005 to 410% in 2020—certainly something you would expect from a company with over 1,500 agencies under its belt.

The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill and intangible assets on Omnicom’s balance sheet.

In recent years, goodwill and other intangibles sits at about $10 billion, which is about one-third of the company’s total assets, arising from acquisitions made to expand its market reach.

Goodwill and intangibles are purely accounting-based and unrepresentative of the company’s actual operating performance. When as-reported accounting includes this in a company’s balance sheet, it creates an artificially inflated asset base.

As a result, as-reported ROAs are not capturing the strength of Omnicom’s earning power. Adjusting for goodwill, we can see that the company isn’t just a below-corporate average returns business. In fact, it has been the opposite, with the company earning returns that have been 7x to even 100x greater.

Omnicom’s earning power is significantly more robust than you think it is

As-reported metrics distort the market’s perception of the firm’s recent profitability. If you were to just look at as-reported ROA, you would think the company is a much weaker business than real economic metrics highlight.

Omnicom’s Uniform ROA has actually been higher than its as-reported ROA in the past sixteen years. For example, Uniform ROA was at 410% in 2020 while as-reported ROA was a hundred times weaker at 4%.

Specifically, after maintaining 37%-40% levels from 2005-2007, Uniform ROA steadily improved to 60% in 2011. However, Uniform ROA faded to 55% in 2012, before recovering to 66%-75% levels in 2013-2014. Since then, Uniform ROA has expanded exponentially to a current peak of 410%.

Omnicom’s Uniform earnings margin is weaker than you think, but its Uniform asset turns make up for it

Uniform ROA expansion has been driven by trends in Uniform asset turns, slightly offset by stable Uniform earnings margins.

Uniform turns steadily improved from 3.6x in 2005 to 5.9x in 2011, before falling to 5.4x in 2012 and rebounding to 7.4x in 2014. Since then, Uniform turns have expanded rapidly, reaching a peak of 34.4x in 2020.

Meanwhile, after gradually fading from 10% in 2005 to a low of 9% in 2010, Uniform margins stabilized at 10% through 2016, before improving to 12% through 2020.

At current valuations, the market is pricing in expectations for both Uniform margins and Uniform turns to sustain current levels.

SUMMARY and Omnicom Group Inc. Tearsheet

As the Uniform Accounting tearsheet for Omnicom Group Inc. (OMC:USA) highlights, the Uniform P/E trades at 12.6x, which is below the global corporate average of 21.9x, but around its own average historical P/E of 13.1x.

Low P/Es require low EPS growth to sustain them. In the case of Omnicom, the company has recently shown an 8% decline in Uniform EPS.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Omnicom’s Wall Street analyst-driven forecast is a 14% and 2% EPS growth in 2021 and 2022, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Omnicom’s $75 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 1% annually over the next three years. What Wall Street analysts expect for Omnicom’s earnings growth is above what the current stock market valuation requires through 2022.

Furthermore, the company’s earning power is 34x the long-run corporate average. Also, cash flows and cash on hand are 3x its total obligations through 2025—including debt maturities, capex maintenance, and dividends. Together, this signals low credit and dividend risk.

To conclude, Omnicom’s Uniform earnings growth is above its peer averages. However, the company is trading below peer valuations.

About the Philippine Market Daily
“Thursday Uniform Earnings Tearsheets – Global Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under UAFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Thursday, we focus on one multinational company that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform earnings tearsheet on a multinational company interesting and insightful.

Stay tuned for next week’s multinational company highlight!


Angelica Lim
Research Director
Philippine Markets Daily
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