Amazon through the growth prism

Markets often distinguish growth from value, but for an equity, growth defines value. For most stocks, this can be seen by the close relationship between the organic revenue growth being delivered by a company and the implied growth rating being discounted by the share's operating FCF yield. A problem however arises when trying to price in an above market growth rate in perpetuity or worse, a growth rate higher than the cost of equity. Markets understand the impossibility of sustaining both scenarios so will inevitably reach out to some sort of horizon point where the valuation will revert back to discount a market average, or below, rate of growth. The question for investors therefore is whether there is a systematic relationship between this mean reversion point and a group's trading performance over a realistic forecasting horizon.

The encouraging news for the investor is that markets do seem to behave rationally in the way they reach out to a valuation horizon and in a way that can also be incorporated into a predictive tool. Markets value stocks on a near term horizon of <18 months unless organic revenue growth exceeds double the market average, from which point the horizon point is progressively extended in direct relationship to relative organic revenue growth. Instead of scratching your head over whether a PE ratio of 150x or 200x is cheap or dear, view your 'super-growther' from a growth prism and one can start to see how markets have really been discounting their growth prospects. This can only be seen at www.growthrater.com and is included in our valuation algorithms.
An example can be seen with Amazon.com and a chart that is available for registered users at:
https://www.growthrater.com/growthrater/#/horizons
 The chart looks at the mean reversion profile of how far out the markets are reaching in their valuation horizons to bring the company's growth rating back to a market average. The orange line is the company's organic revenue growth rate with the green bars being the number of months that the markets are effectively reaching out to revert the growth rating to a market average. A correlation and Rsq is also included in the chart on these two series - currently approx 0.75/0.56 on the period selected, which is not too shabby. The blue bars denote the forward reach that is calculated automatically within my valuation algorithm. As you can see, I have a max horizon of 50 months as a cut-off which is less gung ho than obviously the market at present is reaching out by, although I have been through too many bubbles to be comfortable in pushing the envelope.

Mean reversion horozon is determined by relative rate of organic revenue growth

Publicis Omnicom Groupe - financials less exciting than the impending management soap opera

Oh la la, Omnicom is to be bracketed by Publicis to become part of the greater "Publicis Omnicom Groupe" with deal to be signed in Paris rather than New York or a neutral country. Does this mean a corporate coup for the French or will the emergence of a balanced board and possible removal of Publicis's voting restrictions mean that its ambition will ultimately be its undoing? From what has so far leaked out with regards future management structure, it does not look like a viable longer term proposal, with the enlarged group(e) managed out of both NY and Paris and with a head office in the Netherlands. Perhaps they will go down the Reed Elsevier route and have a dual listing as well, in order to secure their borders from too much Franglais.  It is worth noting however that the original dual management structure at Reed was a disaster and soon dropped; something that will inevitably happen here if adopted unless it is to become a mongrel.

From what we know so far, the enlarged group(e) will reflect an approx 50:50 split between Publicis and Omnicom.  Surprise, surprise, but this is broadly where the respective market capitalisations are already.  Can you imagine the feverish activity as both shares were rising ahead of this announcement the secure this or perhaps we are expected it to be merely fortuitous.


On an EV basis, Omnicom's net debt position v Publicis means that it will be the larger of the two group(e)s going into this 'merger' at around 52% of combined EV


So far we haven't seen much in the way of financial implications of the merger beyond an expected cost synergy of $500m. In the context of around $25bn of consolidated revenues this is about as spot on to my estimate yesterday of a 200bps margin benefit as one might expect some corporate planner also putting his finger in the air to come up with a figure that might impress markets.  What we don't know at this stage however is the level of dislocation to staff and clients this may also bring and the level of revenue leakage one should also be factoring in. For such a big deal, with so much potential for dislocation, this is not that exciting given the pop in both share prices in the run up to all of this. At least the impending soap opera of corporate manoeuvring and back-stabbing between NY and Paris should provide some more excitement!


Is there a winner from all of this?  Well the bankers and advisors of course. Shareholders of Omnicom will probably see their valuation in terms of growth rating back to where it started (posted savings) while Publicis's rating should drop by around 100bps to around +3% CAGR. Omnicom shareholders may consider this as the cost of not chasing after digital acquisitions earlier while Publicis shareholders may wonder whether the dilution in growth rating merely reflects the reality of the situation.






from wyt-i.com