alarm:clock

Tech stocks - Monday, September 15, 2008

Betting on PR For Profits

The staff at tech:stocker is ready for Lehman Brothers (LEH:NYSE) to go away. There is way too much talk and speculation about whether not they are going to be bailed out by the government, get acquired, or get bailed out by the government and then get acquired. While CEO Richard Fuld has pulled off some miracles in the past, especially when the company was spun-off from American Express (AXP:NYSE) back in 1994, Lehman is too far gone for even the largest miracles. Lehman isn't drowning, it's on bottom of the ocean floor weighed down by an enormous amount of diluted commercial real estate holdings. To be honest, we've been tempted to send out a blast email saying we were wrong about Washington Mutual (WM:NYSE) but now that JP Morgan Chase (JPM:NYSE) is looking like a suitor, we're holding pat and adding CEO James Dimon to our holiday card list. If the sale goes through, we think it will add some stability to the financial markets and

Even with Mr. Dimon possibly bailing us out of WaMu, we still wanted to come back with a winner to close out this dismal week. To do this we looked at a company that has done a solid job supporting the tech industry, Omnicom Group (OMC:NYSE).

Advertising and public relations are two sectors that are difficult not to make great money. The two largest expenses both face are labor and real estate. Control those costs and you will make money. And Omnicom knows how to make money by not just controlling these costs, but by winning new business. In 2008 Q2 the company had net business wins of $1.1 billion. While many firms are struggling to find new business, this number is extremely impressive even though it is inline with expectations. From the people we've talked with at Fleishman Hillard, we know they have been able to effectively control employee compensations, including bonuses, by pledging allegiance to their best performers in difficult financial times. While that may hurt profits in weak economic times, the company should be rewarded ten-fold when their customers increase their marketing budgets.

BBDO Worldwide and Fleishman Hillard, the company's best advertising and public relations practices, are tightly run businesses that know how to adapt to changing economic times. Our personal experience with Fleishman Hillard proved that they had the strategy and resources with large PR firms but also had the aggressiveness and desire to obtain tangible results associated with smaller firms. This type of flexibility bodes well for Fleishman Hillard along with the rest of the Omnicom companies if they share a similar business approach.

Over the last few months Omnicom's stock has been punished by investors who are probably following the adage that when the market is weak, companies cut back on marketing spending. We don't find this completely true with Omnicom customers as the company tends to work with companies that are more financially stable and are deeply committed to their advertising and public relations programs. While they may cut back slightly, they are not slashing their budgets entirely so their income may dip, but not crash unlike advertising and public relations firms that work with small companies and start-ups.

With the stock price currently hovering around $40 per share, we are setting a 12-month target price of $50 per share. We think this is being a little conservative but until JP Morgan Chase bails us out of WaMu and Lehman goes away, being conservative right now is the appropriate course of action.