Using a comparable analysis, I recommend a BUY at MDCA'S current price with a potential 19% upside. We will further review key industry trends that strengthen the recommendation that this stock is currently undervalued.
MDC Partners (NASDAQ: MDCA) is a leading global marketing and communications network, providing marketing and business solutions that realize the potential of combining data and creativity. MDC Partners is celebrated for its innovative advertising, public relations, branding, digital, social and event marketing agency partners, which are responsible for some of the most memorable and effective campaigns for the world's most respected brands. By leveraging technology, data analytics, insights and strategic consulting solutions, MDC Partners drives creative excellence, business growth and measurable return on marketing investment for over 1,700 clients worldwide.
MDCA typically invests in creative and digital firms, primarily in North America of small to mid-sized agencies but has since extended onto new global markets. While MDCA does not outright acquire agencies, it instead partners with agency management by acquiring a 51% to 80% initial stake.
Market Strategy: To build, grow and acquire market-leading businesses that deliver the modern suite of services that marketers need to thrive in a rapidly evolving business environment
- In FY2020, MDC Partners generated $1.20B compared to revenue of $1.42B for FY2019 representing 15.3% decreases
- Change in revenue primarily driven by a decline in categories including food and beverage, communications, technology, transportation, financials and automotive, and offset by the growth in healthcare
- 1% of revenue came from the United States, 6.8% from Canada and 13.1% from other
- In FY2020, the firm had an operating loss of $45.8M compared to FY2019 which showed an operating income of $79.5M representing a change of $152.2M
- Loss in 2020 primarily impacted by impairment and other losses
Market and Industry Trends
The advertising agencies market consists of the sales of advertising services and related goods by entities that plan, develop, create and manage advertisement and promotional activities
- Advertising Industry Averages:
- 98% CAGR past 5 years
- 51% ROIC (TTM)
- 43 Sales to Capital Ratio
- Digital transformation has accelerated in recent years
- Increases demand for a broader range of non-advertising marketing communication services (ex. User experience design, digital products, AI, AR, product innovation, direct marketing, sales promotions, PR, etc.)
- Rise of technology and data solutions
- Global marketers now demand breakthrough and integrated creative ideas and no longer require brick-and-mortar communications partners in every market to optimize effectiveness of their marketing efforts
- These changes create new opportunities for small to mid-sized communications companies like MDC
- The industry is expected to reach $455.38B in 2025 at a CAGR of 6.9%
- Estimated ad marketplace to grow by 4% reaching $230B for the year 2021 (USA)
- Local TV ad spend will drop by 20.4% due to decrease in political ads
- YoY digital media forecasted to grow by 8%
- Estimated ad marketplace to grow by 10.2% reaching $651.1B for the year 2021 (Global)
- YoY digital media ad spend is forecasted to increase by 14.1% totalling $396.8B
On December 21, 2020, MDC and Stagwell Media LP announced they entered into an agreement that greatly benefits MDC. Stagwell is a digital-first, insights-based marketing company that works to focus on the needs of marketers by providing insights and counsel to world's most trusted brands across the US and with 5M+ surveys collected annually. Operating in 49 cities and 20 countries, they are in the top 25 of 2020's list of largest global advertising groups.
This combination unleashes the power of talent and tech around the world to create a top 10 global integrated marketing services company that will provide the best-in-class solutions that marketers need to thrive in today's marketplace.
- Triples the contribution of high-growth digital services and expertise to 32% compared to MDCA alone
- Planning to invest in expanding services across global markets and in expanded digital marketing products
- Enhanced global scale across 23 countries
- New revenue streams from expanded digital and technology products
- Targeting 5+% annual organic growth rate, driven by 10-15% digital marketing growth and 9% total annual revenue growth including new products and acquisitions
- Target to grow to $3B+ in revenue in 2025
- Representing a CAGR of 20.13%, outperforming the industry's expected CAGR for 2025
Risk Factors: Highly Competitive Industry
- MDCA operates in a highly competitive industry characterized by many different advertising and marketing agencies of varying sizes
- There's competition for creative reputation, quality and the reliability of services and expertise, etc.
- Barriers to entry are minimal making it easy for smaller agencies to take all or some portion of a client's business from larger competitors
With the anticipated revenue generated from MDCA's latest agreement with Stagwell, and the market and industry trends going forward, this stock would be a good BUY with a price target of $6.21 representing a 19% upside. With the industry growing at a CAGR OF 19.98% in the past 5 years, I believe this industry presents consistent growth. With that being said, MDCA still faces significant competition in this high-growth industry with minimal barriers of entry.