MDCA 2Q:08 Revenue Expands 17% Despite The Deepest Advertising Recession In a Generation; Reiterate Buy Rating and $13 Target

Investment Thesis:



We think MDCA will take market share from other agencies as advertisers seek to maximize ROI on advertising budgets and we also expect MDCA's CRM franchise to benefit from a weak US dollar.



KEY Points:



*MDCA's advertising franchise is firing on all cylinders despite a challenging advertising environment.



*MDCA double digit organic revenue growth (almost 15%) surpassed the company's peer group revenue growth (9%) which includes acquisitions.



*Clearly MDCA is taking market share and expect this trend to continue as companies like WPG and OMC are reeling from a difficult economy.



We Note: Rita Spitz an analyst from William Blair Asset Management recently said "You obviously do not know what you are talking about and have no understanding of the ad industry" when I called for a cyclical slowdown in ad industry sales in 1Q:08. Since then my analysis was proven correct and OMC and WPG shares (Rita's largest holdings) are down about 17% as industry growth has declined due to a recessionary US economy and slowing international growth. In contrast to its peers, MDCA shares have held their own despite the recent market turmoil and revenue continues to expand.


It is now clear that Rita Spitz (among others) owes me an apology; but I shall not hold my breadth since arrogance generally trumps talent and common sense on Wall Street.



Recent Events:

*On July 29, 2008 after the market closed MDCA reported a 2Q:08 loss from continuing operations of $0.10 versus our estimate of $0.08 and Wall Street consensus of $0.06.

*Excluding higher than forecasted taxes in 2Q:08 ($3.4 million versus our $1.5 estimate) MDCA's loss from continuing operations was $0.01 or much better than we expected.


*Revenue and EBITDA are perhaps the most relevant metrics used to evaluate MDCA shares as advertising industry accounting practices understate MDCA's profitability. Using these metrics MDCA surpassed our expectations.

*2Q;08 sales of $158 million surpassed our $143 million forecast.

*EBITDA in 2Q was $15.8 million also exceeded our estimate ($13 million) for 2Q:08.

Outlook and Valuation

*We think the outlook for MDCA shares is bright as the company will benefit from stable ad budgets from its family and fast food advertising clients such as Wendy's, Domino's Pizza and Burger King.

*We expect MDCA to benefit as advertisers cut back on costly international advertising to focus on US markets (MDCA derives over 90% of its revenue from North America). In the US the weak dollar will enable international advertisers to purchase more for thier ad dollar thus boosting the ROI for ad budgets.

*On the earnings conference call MDCA gave 2008 revenue guidance in a range of $600-$610 million. While management is calling 10% revenue growth we are raising our 2008 revenue estimate to $614 million (from $604 million) as management generally gives low-ball sales guidance.

*We expect MDCA will post Adjusted EBITDA of $65 million in 2008 and $67 million in 2009 as MDCA lands new accounts and expands sales to existing clients.

*To derive our $13 price target, we apply a 9x EV/EBITDA multiple which may be conservative and is at the low end of MDCA's peer group EV/EBITDA multiple range of 8x-14x.

We also note that MDCA is an attractive takeover target as MDCA's high growth ad agencies offer compelling synergies to strategic industry parners. We think a 10%-20% premium to our target price is probably conservative if a player like OMC or WPG were to target MDCA.

Moreover, any MDCA acquisition could be essentailly self funded as we think MDCA's CRM business is worth $140 to $200 million (1x-1.5x sales) if sold to to a larger call center operator such as IBM or CSC.

With significant upside to our estimates and our $13 target we recommend that investors purchase MDCA shares.

I will have updated financial models available in excel for purchase once MDCA releases its 10Q.