IPSOF - Ipsos SA

[Laxputs]

Ipsos

 

Third largest research agency in the world.  Recent earnings slide was due mainly to currency exchange effects, and a small amount due to drop in revenue (1%, which the company says were from non-recurring factors: i.e. World Cup, and growth will continue). The stock is at a 52 week low. The industry has tailwinds.

 

I have approximate projections of CFO 2014 around 100mm. They did about that much in previous years with 20% lower revenue, so I could be conservative here.  More digging needs to be done on currency effects and if that is the main reasons margins were higher before.

 

Average capex was 19mm per year, the last 4 years. But they have been acquiring. So I am going to use their 1H14 6.3mm capex number, annualize it.

 

100mm - 12.6mm = 87.4

87.4 / 45.3 = 1.93 FCF/share.

18 / 1.93 = 9x FCF

 

Any one have anything much different?

 

 

[magno111]

Hi very good research

 

remember to see FCF as  EBITDA-capex-int-taxes

 

IPSOS EBITDA is around 200M

 

so FCF=  200 -12 capex-33tax-28 int= 125M€ FCF

 

There are 45M shares so FCF per share is 2.75€ it is trading at 6.5x  P/FCF...

 

French people are crazy...

[yadayada]

what is their moat.

[magno111]

what is their moat.

 

It has been a market controlled by very few firms, so that means there's a moat.

 

It is a reputation business, it isn't like moody's but very similar. For brands is very important to have market research  and data analitycs and it cost very little compared to total advertising spending.it is like a toll bridge in other's people advertising expense. it is an asset-light business. ROCE is very good.

 

In order to compete with GFK and IPSOS in Europe you have to build up a reputation, it can take lots effort... there weren't any new entrants to the market is the last years....

 

Nielsen has been buying competitors... it is trading at 22-25xP/E... they can issue shares at 22x to buy at 6,7x...

 

 

[Guest Schwab711]

what is their moat.

 

It has been a market controlled by very few firms, so that means there's a moat.

 

It is a reputation business, it isn't like moody's but very similar. For brands is very important to have market research  and data analitycs and it cost very little compared to total advertising spending.it is like a toll bridge in other's people advertising expense. it is an asset-light business. ROCE is very good.

 

In order to compete with GFK and IPSOS in Europe you have to build up a reputation, it can take lots effort... there weren't any new entrants to the market is the last years....

 

Nielsen has been buying competitors... it is trading at 22-25xP/E... they can issue shares at 22x to buy at 6,7x...

 

I wouldn't necessarily say there is a moat because there are few companies. It could be that it is low-profit margins so most businesses don't care to chase the profit. There are many niche market research companies that I would think an investor would realize higher returns with than a large multi-industry research company. I find it hard to believe that the 3rd largest research company in the world, which lacks a niche or certain expertise, has a moat. Even if you look at the market leader, Nielson N.V., the financials do not point to a 'moat' of any kind. Margins are low, there is no operating leverage, no large FCF yield, average ROIC/ROE returns (although ROTA is excellent), ect. The only thing interesting about NLSN at first glance is the low CapEx vs. depreciation. If you think about the business model, market research, the only possible avenue for a competitive advantage is loyalty/brand recognition/accuracy. I think this is an example of a well known brand (Nielson TV ratings comes to mind) but there is literally no barriers to entry and it is very cheap to start-up a competitor.

 

I think the over-use of the word "moat" is rampant and can be quite damaging to returns as well as lead an investor into value-traps at a higher rate. Think of RadioShack, household name with no competitive advantages. Many pointed to how well known it was and the value of property as a source of value. It was ultimately over-extended retailer that sold other company's products. They were no different than your local Kwik-E-Mart other than products sold. 99% of companies do not have a moat/competitive advantage and are able to operate profitably in spite of this. I think many "true" moats are overlooked and undervalued in my opinion because the word "moat" is thrown around so often. I think of companies like Stryker (SYK) whose forward P/E (don't get me started on how unreliable/made-up this is) is 15. In this case, I think 15 will end up being fairly accurate based on earnings power.

 

In summary, I really like the market research business but there is no need to claim there is a moat when none exists in my opinion. It is a fine potential investment regardless. Wells Fargo has no moat, just an excellent business model (relative to peers), excellent customer loyalty, and excellent execution/management.

[yadayada]

a business can have large barriers to entry and be a rational duopoly or oligopoly. Given that there are no new entrants, there is obviously a barrier to entry. I think there is an unspoken mutual understanding between companies in those industries to not go on pointless pricewars as that will hurt everyone and benefit no one in the end. In this case it is probably better to say that the industry has a moat and acts rational in their best interest.

[magno111]

what is their moat.

 

It has been a market controlled by very few firms, so that means there's a moat.

 

It is a reputation business, it isn't like moody's but very similar. For brands is very important to have market research  and data analitycs and it cost very little compared to total advertising spending.it is like a toll bridge in other's people advertising expense. it is an asset-light business. ROCE is very good.

 

In order to compete with GFK and IPSOS in Europe you have to build up a reputation, it can take lots effort... there weren't any new entrants to the market is the last years....

 

Nielsen has been buying competitors... it is trading at 22-25xP/E... they can issue shares at 22x to buy at 6,7x...

 

I wouldn't necessarily say there is a moat because there are few companies. It could be that it is low-profit margins so most businesses don't care to chase the profit. There are many niche market research companies that I would think an investor would realize higher returns with than a large multi-industry research company. I find it hard to believe that the 3rd largest research company in the world, which lacks a niche or certain expertise, has a moat. Even if you look at the market leader, Nielson N.V., the financials do not point to a 'moat' of any kind. Margins are low, there is no operating leverage, no large FCF yield, average ROIC/ROE returns (although ROTA is excellent), ect. The only thing interesting about NLSN at first glance is the low CapEx vs. depreciation. If you think about the business model, market research, the only possible avenue for a competitive advantage is loyalty/brand recognition/accuracy. I think this is an example of a well known brand (Nielson TV ratings comes to mind) but there is literally no barriers to entry and it is very cheap to start-up a competitor.

 

I think the over-use of the word "moat" is rampant and can be quite damaging to returns as well as lead an investor into value-traps at a higher rate. Think of RadioShack, household name with no competitive advantages. Many pointed to how well known it was and the value of property as a source of value. It was ultimately over-extended retailer that sold other company's products. They were no different than your local Kwik-E-Mart other than products sold. 99% of companies do not have a moat/competitive advantage and are able to operate profitably in spite of this. I think many "true" moats are overlooked and undervalued in my opinion because the word "moat" is thrown around so often. I think of companies like Stryker (SYK) whose forward P/E (don't get me started on how unreliable/made-up this is) is 15. In this case, I think 15 will end up being fairly accurate based on earnings power.

 

In summary, I really like the market research business but there is no need to claim there is a moat when none exists in my opinion. It is a fine potential investment regardless. Wells Fargo has no moat, just an excellent business model (relative to peers), excellent customer loyalty, and excellent execution/management.

 

Well i think the moat could have different sizes, this is not KO or PG but i think it isn't a commodity business.

 

is it a 7x PER fair for this business? probably not

Does the market overreacted with recent events? i think so

 

9 months ago they had the same earnings power and it was trading at 35€ now it is at 18€. it is gift from Mr. market.

[Packer16]

The market research business has two segments associated with it, continuous research and ad hoc studies.  The continuous research side is the more protected side of the business that has network effects which provide huge advantages to the first mover.  These are industry standard sources of data which collected and analyzed by a clear leader.  This business once past the fixed costs has huge incremental profitability (operating leverage).  The ad hoc studies is more like consulting and has more of a commodity aspect to it.  Ipsos, GfK, NPD (private) and Nielsen are the big continuous guys which have some ad hoc research also.  The other players are primarily ad hoc guys.

 

Packer 

[ukvalueinvestment]

They have quite a bit of debt, don't they?

 

Is P/E or P/FCF the correct metric?

[magno111]

They have quite a bit of debt, don't they?

 

Is P/E or P/FCF the correct metric?

 

This kind of business can support high level of debt because cash flows are very predictible. Nielsen for example has around around 4,5x DEBT/EBITDA. Ipsos is at 2,5x DEBT/EBITDA and GFK is around the same.

 

I think it is cheap on absolute basis but you can compare it to GFK or nielsen

 

Nielsn trades at around 13x EV/EBITDA ( i think is a bit overvalued...) and GFK is  trading at 10x EV/EBITDA, even after the drop from 45€ to 30€. EBITDA multiples in this business seem high but cash conversion is also high. At 10x EBITDA IPS is worth around 33€ almost a double.

 

GFK and IPS have similar ROCE , margins, revenue trends, same markets, same size, and similar debt levels. GFk is trading at around 15x PER.

 

Maybe the market doesn't like it is a family controlled business and they made questionably capital allocation decisions  in the past.

[yadayada]

I have 2 problems with this one.

 

1. I don't see FCF being as high as you say. Revenue is in decline as well. And based on this year, multiple is more like 8-10x.

 

2. Capital being destroyed by the family. This is huge and often underrestimated by investors I think. If you think they will generate about 1.5 billion euro;s over the next 10 years, but they could destroy like 500 million then the company should deserve a serious discount. And could deserve a premium if they are very good allocators.

[magno111]

I have 2 problems with this one.

 

1. I don't see FCF being as high as you say. Revenue is in decline as well. And based on this year, multiple is more like 8-10x.

 

2. Capital being destroyed by the family. This is huge and often underrestimated by investors I think. If you think they will generate about 1.5 billion euro;s over the next 10 years, but they could destroy like 500 million then the company should deserve a serious discount. And could deserve a premium if they are very good allocators.

 

you are looking at past numbers, they were growing in the past so they need working capital to grow, but now once the grows slow working capital reverses  FCF expands ( look at H1 2014) revenue is flat adjusting for currency movements. The recent decline in Euro is going to help them.