Stock pick: MDC Partners Inc. (MDZ.A) is communicating confidence

Next up: global expansion

Chart showing trailing 12-month stock price performance of MDC Partners Inc.

If you’re looking a company to bet on, consider looking at one in the marketing and communications industry. With more competition for consumer eyeballs than ever before, more and more dollars are being placed with advertising agencies. McKinsey and Company is expecting global ad spending to increase by 35% between 2012 and 2017.

One company that’s done well and is positioned to see even more gains is New York-based MDC Partners Inc. (TSX: MDZ.A). The company, which owns 49 firms and is led by Toronto’s Miles Nadal, is up 150% over the last 12 months, and most of the analysts who cover the company think it can climb even higher.

On April 25, MDC released its first quarter results and the numbers were impressive, writes James Marsh, an analyst with Piper Jaffray. It made $293 million in revenue, which beat his estimates by $10 million, while EBITDA was $39.4 million, well ahead of his $27 million estimate. EBITDA margins also increased by 90 basis points during the quarter to 12.5%

“We think (the company) has very solid fundamentals, progress in stated objectives and a relatively inexpensive valuation of 8.9x 2015 EV/EBITDA,” writes March. “It’s an attractive mix for investors.”

David Bank, an analyst at RBC Capital Markets, was impressed by the amount of net new business it took in the quarter — $24.4 million worth, he wrote in a report. It brought in $133 million of new business last year, so it’s a good sign that it’s still landing new work this year too.

“These wins should give investors confidence in MDC’s ability to execute plans and meet or exceed guidance,” he says.

Marsh thinks the company is in a strong position to ramp up its organic growth and profitability. It’s acquired numerous agencies and it’s formed a data analytics group over the last three years and it’s focusing more on international expansion.

“Management highlighted its global expansion as a new leg of growth opening 10 offices in the last two years and adding key hires with experiences in overseeing Europe and Asia regions,” writes Marsh. “While international revenue represents only 7% of total revenue for MDC, the growth trends there are impressive as evidenced by the 30% growth so far in 2014.”

The company, despite its attractive valuation, is still trading at a premium to its peers. However, Bank thinks its EBITDA growth rate will be double the competition’s in 2015. “The valuation is justified,” he writes, adding that it’s also paying a 2.99% yield.

The stock is currently trading at $24 a share, but Bank thinks it will hit $27 over the next 12 months and Marsh says it could reach $30. The mean 12-month target price is even higher at $33 a share.