Needham Analyst Laura Martin initiated coverage of Stagwell Inc STGW with purchase recommendation and a target price of $9. She believes revenue and EPS are predictable given that 20% of annual revenue comes from recurring maintenance contracts, plus 60% to 70% of revenue comes from multi-year contracts.

STGW has revenue and EPS benefits from its advocacy agencies, he noted.

For example, Targeted Victory retains 5% to 10% of the funds it raises from long-tail donors, which have grown from $100 million 8 years ago to a projected $1.2 billion in 2022 and during the US$2 billion in the 2024 presidential cycle.

In the second quarter of ’22, STGW grew faster than other ad agencies due to its digital capabilities, Martin noted. Specifically, 57% of STGW’s net revenue and 62% of its Adjusted EBITDA in Q2’22 came from digital services.

STGW compares favorably to the 11 ad-driven companies it covers, with the material valuation offering several advantages. STGW’s improving debt ratings are lowering STGW’s average cost of capital, which it believes is leading to an upgrade rating.

Following the company’s restructuring in August 2021, STGW has aggressively reduced costs. In addition, STGW has expanded its offshore engineering teams. All of this could boost EBITDA margins.

Martin noted that STGW has a strong M&A track record of acquiring businesses cost-effectively, retaining top talent and creating a collaborative business environment that accelerates revenue growth by winning incremental new business as it adds new capabilities.

Digital advertising now accounts for over 50% of all US advertising as it enables personalized targeting of consumers on their smartphones, tablets and laptops. Growing complexity and audience fragmentation are helping STGW as media mix modeling becomes more important, Martin added.

Price promotion: STGW shares traded 1.18% higher at $6.41 on the latest check Tuesday.