Stagwell Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Stagwell Inc. is a marketing and communications company that helps brands grow through integrated creative strategies, data analytics, and media buying solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Stagwell operates as a global marketing and communications company, providing a variety of services to its clients across several marketing-related sectors. The company’s services are organized into several reportable segments:

Integrated Agencies Network: This is Stagwell’s largest reporting segment. It houses the integrated marketing agencies that focus on offering a unified, full-service approach to clients. This would include services like: media buying, creative marketing strategy, data & analytics, performance marketing, and digital and experiential marketing.
Media Network: Provides digital advertising, television advertising, mobile marketing, out-of-home marketing, radio, print, and other forms of media advertising. It also includes media strategy and planning.
Communication Network: This segment is a public relations and public affairs business that works with large corporations. It includes providing support in crisis management, public affairs, employee communications, media relations, and corporate communications strategy, including investor relations services.
Insights & Analytics: This segment provides companies with information that they need to make strategic decisions, helping companies better understand their markets and customer behavior. It focuses on research and analysis as well as marketing analytics.
Brand Performance Network: This segment houses a variety of specialized marketing solutions such as brand management, data intelligence, performance analytics, and technology implementation services. It also includes brand strategy services and insights.
Other: This segment includes a variety of smaller investments, and is not particularly meaningful to the overall financial performance of the company.

Historically, Stagwell’s business model relied heavily on M&A activity, wherein it acquired a mix of agencies. While acquisitions continue, its growth model is starting to favor organic growth, which means that the company’s existing businesses will be contributing to more of its revenue growth. The management believes it can continue to deliver high revenue growth over time, primarily by cross-selling new services across its vast portfolio of clients and capitalizing on the synergies created by recent acquisitions.

Industry Trends and Competitive Landscape The marketing and advertising industry is undergoing considerable changes as a result of technological advancement and changing consumer behaviour.

Digital Transformation: The shift towards digital marketing is creating high demand for analytics, SEO, and social media marketing, all of which favor integrated agency networks like Stagwell.
Data-Driven Marketing: Companies are increasingly focusing on data to make strategic decisions. This also favors firms like Stagwell which have robust data analytics capabilities.
Increased Demand for Integrated Solutions: Clients are more likely to demand a full suite of offerings from their agency partners, which benefits firms that provide a large range of marketing services.
Rapid Technological Advancements: The rate of change is accelerating and new technologies like AI, cloud computing, and web3 present new growth opportunities for companies that are nimble.
Growing importance of content marketing: With content overload, it is important to be able to develop high-quality content that cuts through the noise, which requires a lot of creative input that Stagwell is well positioned to provide.
Changing client expectations Client expectation are for tailored solution and demonstrable return, leading clients to seek specialist agencies that are better aligned with their marketing goals.

Competitors: Stagwell operates in a competitive market with varied players. Its main competitors are the established global advertising giants such as WPP, Publicis, Omnicom, and Interpublic Group, all of whom are more mature, larger, have a longer history and more established market presence than Stagwell. However, Stagwell believes it can leverage the flexibility and expertise of its integrated agency network, and the data and analytical capabilities it offers, as key differentiators to help attract clients and win business.

Moat Analysis:

Moat Rating: 2/5

Switching Costs: There is some degree of switching costs for clients to change their marketing agency, such as the inconvenience and operational challenges of switching partners, and also the high level of integration between services of a multi-faceted agency like Stagwell. But in reality, the switching cost is quite low as they can find new agency partners and new solutions from time to time.
Intangible Assets: Stagwell has some intangible assets in the form of brands and industry relationships. However, these intangible assets are not large enough or strong enough to create a significant and durable moat in itself.
Cost Advantage: They do not necessarily have any cost advantages that provide them with a moat.
Network Effect: The network effect doesn’t play a material role for Stagwell.
Conclusion: Despite the presence of some switching costs, the competitive position of Stagwell is quite weak. It is in a very competitive industry with low barriers to entry. The company primarily competes on the value of services and expertise, rather than any structural or intrinsic competitive advantage or a wide moat.

Risks to the Moat and Business Resilience:

Economic Downturn: Marketing budgets are often cut significantly in economic downturns, which would negatively impact the revenue of Stagwell. While the company has been trying to diversify into more resilient sectors like healthcare and government, a major portion of its revenues still depend on corporate marketing budgets, which can fluctuate greatly with changes in economic activity.
Client Concentration: Stagwell has some large clients (primarily within the U.S.) that represent a significant portion of revenues, and the loss of any of these large clients can significantly impact its business operations.
Competition: The advertising and communications industry is highly competitive. New players and innovative solutions keep entering the market, putting pressure on companies to retain their market share. The company also faces intense competition from global advertising giants.
Technological Changes: Fast-paced technological changes and the rise of AI could shift the dynamics of the industry and make some of their offerings obsolete or less relevant. Competitors are likely going to quickly adopt such technology to better suit the ever-evolving marketing needs of their clients.
Acquisition Integration Risks: The company’s history with acquisitions introduces some integration risk. If Stagwell fails to capitalize on the synergies that it expects from the acquired entities, or if the integration process is managed inefficiently, it can hamper the overall performance of the company.

Business Resilience The company has demonstrated a strong ability to perform acquisitions and integrate them into its overall framework, but also needs to focus on maintaining its existing business, especially in volatile market conditions. The business also needs to remain on the edge of new technology and marketing strategies, if it wants to maintain its competitive positioning.

Financials Analysis The most recent quarterly results show a mixed bag of results.

Revenue for the three months ended September 30, 2023, was $728 million, compared to $673 million for the three months ended September 30, 2022, an increase of 8.1%.
Operating expenses for the same period increased by 7.7% from $611 million to $658 million.
Operating income for the three months ended September 30, 2023 was $70 million compared to $62.5 million for the three months ended September 30, 2022, an increase of 12%.
Net Income attributable to Stagwell Inc. common stockholders was $3.5 million, compared to $11.6 million, for the same period in 2022.
While the revenue saw a healthy increase, profitability took a hit from a combination of higher operating expenses and rising interest costs.
For the Nine months ended September 30, 2023 revenues was $2,003 million, up from $1,876 million in the previous year for the same period. However, net income attributable to common shareholders decreased significantly to -$4.4 million in 2023, from $132.1 million in 2022 during the same period.
The company reported a debt of $1.1 billion and cash of $145 million. That gives it Net debt of $955 million, significantly more than its equity of $344 million, and demonstrates the company has high leverage.
The debt-to-equity ratio is extremely high at more than 2:1.
While Stagwell’s earnings are volatile, the company maintains to keep delivering on its long-term guidance of 5-8% organic growth and 10-15% net revenue growth, including acquisitions.
The company is focused on improving margins through cost reductions, which will be crucial for improving its net income.
Management acknowledges the need for reducing debt through further deleveraging, by way of higher earnings as well as focusing on debt repayments.

Understandability Rating: 3/5

The business model is not particularly complex to understand at a high-level. It’s a network of marketing agencies with a variety of service lines, but understanding and differentiating between each agency or network is difficult for most casual observers. Understanding the industry specific drivers and complexities and nuances also requires a deep dive into the industry. The valuation is extremely complex to calculate as well.

Balance Sheet Health: 3/5 The company maintains a balance sheet that is stretched because of its recent acquisitions, and has a high amount of net debt. While the company is trying to reduce debt by using excess free cash flow, the debt to equity is extremely high at 2:1 and requires further improvements for the rating to increase. The company also suffers from negative working capital. While a negative working capital balance is not always bad, it can be a sign of financial distress and should always be viewed in a company-specific context.

The company has sufficient liquidity, but it needs to improve and manage its debt more prudently.

Recent Controversies/Concerns and Problems:

Disappointing earnings: Some of the most recent quarterly results show a decline in earnings. In particular, net income attributable to common shareholders saw a sharp decline which was caused by non-recurring costs. As a result, analysts have started to question the company’s ability to deliver strong profitability while it is pursuing growth initiatives, as they expect more from established business segments and organic growth to improve.
High Leverage: STGW has a substantial amount of debt in its balance sheet. This adds significant risk during recessionary times.
Dependence on Acquisitions: While recent revenue has been trending up, a good portion of it is due to acquisition. A large part of the company’s strategy also hinges on successfully integrating new acquisitions, which might not go as planned.
Management Turnover: Recent news also suggest key executives have been leaving the company, which could indicate management/planning challenges, or friction within the company.

Management’s Perspective: The company’s management has reiterated its commitment to reduce debt through its own profits and free cash flow. Management has also insisted on its ability to achieve high rates of organic growth while at the same time improving margins and cutting costs, and creating synergies with new acquisitions. They also expressed confidence about being able to meet guidance.