Omnicom Group Inc. (OMC) is scheduled to release its second-quarter 2010 results on Tuesday, July 20. The Zacks Consensus Estimate is 77 cents, a penny above the year-ago level but 48.0% above the first quarter 2008 EPS of 52 cents.

In the first quarter 2010 also EPS dipped by only $0.01 from $0.53 to $0.52 and net income remained relatively flat at $163.4 million, compared to $164.5 million in the year-ago quarter.
However, revenue grew 6.3% year over year to $2,920.0 million from $2,746.6 million in the first quarter of fiscal 2009, attributable to the general business environment, which continues to stabilize and improve. Domestic revenue reached $1,592.8 million, up 3.9% from $1,532.3 million during the same period in the previous year. International revenue rose 9.3% to $1,327.7 million from $1,214.3 million in the year-ago quarter.

Agreement of Analysts

For the second quarter of 2010, out of 12 analysts covering the stock, 6 have moved their estimates downward over the last 30 days, with none moving up. The reason is the decrease in the margin expectations. Analysts believe that the current business environment might not support Omnicom’s higher investment, which may drive lower margins in the near term.

Thus, for fiscal 2010, in the last 30 days, out of 15 analysts covering the stock, 7 analysts reduced their estimates, while none moved in the opposite direction. For fiscal 2011 also, 6 analysts downgraded their estimates, while only one moved up. Hence, we see a downward pressure on the stock. Overall, for the near term, the view is negative.

Magnitude of Estimate Revisions

For the immediate quarter, estimate went down by only a penny from 78 to 77 cents. For fiscal 2010 and 2011, it went down by 3 cents each from $2.73 to $2.70 and $3.10 to $3.07, respectively.

Our Recommendation

Omnicom has improved coordination between the diverse advertising and marketing strategies of its global customers, which should augment cross-selling opportunities across the company’s businesses.

Despite the current challenging economic environment, Omnicom continues to generate new business wins and has acquired complementary companies to expand its client base. In reaction to the current economic challenges, management has aligned the company’s cost structure by right-sizing headcount and reducing compensation pools, which will show long-term results.

However, an intense competitive advertising environment, pricing pressures continue to negatively impact operating margins. Thus, our long-term recommendation for the stock remains Neutral in line with the Zacks #3 Rank, which implies a short-term recommendation of Hold.
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