Description

Stagwell Inc. (STGW)

Price:  $6.50        

Mkt Cap: $1.9BN

Ent Val: $ 3.1BN

EV / Rev:   1.4x LTM and 1.0x fwd.

EV / EBITDA:  7.0x LTM, 6.7x fwd.

P/E:  6.5x fwd. 14% FCF yield

Price Target:  $9-11 (short-term), $15-18 (long-term)

Situation Analysis

We originally wrote up MDC Partners, the predecessor to Stagwell Inc. (“STGW” or the “Company”) around the time of its combination with MDC in 2021.  If interested in the background of the combination, please reference prior write ups on MDC Partners.   

STGW is run by Mark Penn a well-regarded marketing executive and one of the best CEOs in our investment portfolio.  Since Mr. Penn has been leading the business, Stagwell has consistently delivered value for shareholders while successfully navigating the Company through the pandemic that included a complex corporate combination.  

Penn owns a substantial amount of equity and is committed to continual improvement of the organization ranging from the enhancement of product / solution capabilities to prudently managing expenses and cash flow generation.

Given the impressive transformation of the business since the combination, we felt it would be constructive to provide an update as we feel that the risk / reward to own STGW is the best it has been in a very long time.

Stagwell manages an integrated network of top-tier ad agency / creative agencies and digital marketing assets designed to provide a digital-first oriented strategy to over 4,000 blue chip clients.  Approximately 20% of annual revenue is recurring with an additional 60-70% coming from multi-year engagements. 

Stagwell’s unique differentiation and cross pollination of creative, technology and consulting assets is not only leading to new customer wins but is also increasing share of wallet with existing customers. STGW’s scope and newly achieved scale of its offerings has successfully positioned itself as a formidable competitor to larger players in both traditional advertising and ad tech. The Company is increasingly employing a performance-based approach (vs. traditional billing) that not only entrenches itself with clients but also affords for more durable revenue streams.

Stagwell is actively investing in proprietary marketing cloud, AI and Augmented Reality applications to continue to drive growth more than twice that of traditional advertising.  Some divisions within Stagwell are growing well over 50% per year contributing to overall organic growth of 14% for FY2022.  Apple, Amazon, Google and Microsoft are some of STGW’s top clients providing credibility to the strength of STGW’s technological capabilities.   

Last week (Mar. 9^th) after reporting a solid quarter that generated substantial free cash flow for the year ($270MM or ~$.90 a share), STGW facilitated a secondary stock sale of 16 million class A shares (22% of float) from indirect PE owners at $6.75, a 25% discount to where the shares were trading following its Q4 earnings call. 

We feel that the unfortunate timing of this offering (given market conditions) presents a strong opportunity to own shares in a high growth, high cash flow generative enterprise with best-of-class management, record low leverage (2.2x) and a strong capital structure (majority of debt stack is locked in at 5.625% through 2029).    

Why is STGW Mispriced?

• Leading agency in digital transformation with above industry organic growth: 
  • Less susceptible to macroeconomic forces related to advertising spend, STGW is focused on performance marketing and is investing in its core digital platforms for its blue-chip customer base and is gaining demonstrable market share.
  • 10-14% 2023E annual revenue growth, ~2x that of traditional advertising companies.
  • STGW has developed the Stagwell Marketing Cloud which are SaaS and DaaS tools built for the in-house marketer.  Applications include data as a service tools for market researchers, a SaaS platform for communications professionals and a DIY platform for in-house media buyers.
    • Collectively, the segment will generate ~$140MM of revenue in 2023 with a target to achieve run rate revenue of ~$500MM by 2027.   
• 57% of revenue and over 50% of EBITDA is oriented toward digital transformation: 
  • Digital Platforms and Tech (28% of revs, grew 33% organically last year)
    • Applications to enable customers to engage with consumers across the digital ecosystem with in-house software applications licensed to clients using subscriptions.
  • Performance Media and Data (21% of revs, grew 9.6% organically last year)
    • Omnichannel media strategies to place advertisements across digital channels.  Unlike media companies that own a large amount of TV inventory, STGW is media-agnostic and employs solutions including audience analysis and media planning and buying.
  • Consumer Insights and Strategy (11% of revs, grew 25% organically last year)
    • Large-scale online surveys, specialized research and data analytics.
• Cheap on an absolute and relative basis with superior growth characteristics:
  • 10-14% 2023E organic growth, 7x fwd. EBITDA, 6x P/E and a 14% FCF yield.
    • Higher growth-oriented marketing services / ad tech comps trade 10-13x EV / EBITDA.
• Solid Balance Sheet, Conservative Capital Structure and Balanced Capital Allocation: 
  • 2.2x ND / EBITDA - $1.1BN 5.625% senior notes due 2029, $500MM revolving credit facility with only 20% drawn.  Moody’s upgrade from B1 to B2 in Jul 2022.
  • 8 strategic acquisitions in 2022, upsized share repurchase program to $250MM from $125MM.
    • Built out infrastructure around M&A will allow for incremental returns on capital from new products and services.
    • M&A related deferred acquisition costs (DAC) materially declining ($161MM at YE22) to a de minimus level by 2025.

Valuation Considerations

• On a relative basis, STGW is trading in line with traditional advertising companies (median of 7.0x EV/EBITDA but features superior growth and margins.  
• Advertising-oriented technology-enabled consulting and analytics companies with comparable growth and margin prospects are nearly twice that (median of 13.1x) of traditional advertising firms.
• On an absolute basis, STGW is trading at a 14% FCF yield.
• We think that at the minimum, STGW should trade at 8-10x EV / EBITDA or an 8-10% FCF yield, which gets us to our near-term target price of $9-11 per share.
• Longer-term as STGW continues to outpace the growth of the industry and generates cash flow, we think it is reasonable for the stock to trade $15-18.

Risks and Considerations

• Economic Uncertainty:  Parts of business can be volatile due to economic / macro conditions.  As evidenced during the pandemic, management is adept and managing the business through economic cycles.  Costs are largely variable and can be flexed depending on market conditions.  Management continually takes costs out of the business.
• Liquidity Considerations:  Stagwell and PE affiliates continue to own a meaningful number of shares, and Stagwell may provide liquidity from time to time to the market.  While this may hold back valuation initially, the stock should rerate as management continues to prove out its operating plan and drives value. 

Catalysts

• Continued growth in and margin expansion from digital-oriented businesses should contribute to a multiple rerating.  
• Increased investor awareness, better understanding of higher growth digital business, eventual sale of business once desired scale is achieved.

Catalyst

• Continued growth in and margin expansion from digital-oriented businesses should contribute to a multiple rerating.  
• Increased investor awareness, better understanding of higher growth digital business, eventual sale of business once desired scale is achieved.