• by Joe Mandese  @mp_joemandese, November 21, 2006

The good news for the Interpublic Group: Wall Street investors believe it has turned itself around and is driving its stock price up. The bad news: the company has been a little too exuberant, says a major Wall Street securities firm--pushing share price higher than it may be currently worth.

"We are downgrading Interpublic from neutral to sell," Merrill Lynch analyst Lauren Rich Fine wrote in an equities research report issued Monday, asserting that shares of the ad agency holding company--the parent of Initiative, Magna Global and Universal McCann--are trading at about 10% more than their logical market value.

Fine says some investors may be "double counting" Interpublic's recent new business wins as "incremental"--when in reality, they are merely enough to keep the agency in line with current earnings estimates.

"Interpublic's very visible Wal-Mart win, as well as the recent win of Glaxo-Smith, is evidence that the company is gaining traction and will show improved top-line results prospectively," she wrote, adding that the gains from those victories have already been factored into Interpublic's underlying value.

However, she noted that Interpublic's management team is utilizing its recent windfalls to invest in the future, hiring top talent in hopes of winning more new business.

"While we hate to 'kick' a company when they are executing better, we cannot see how Interpublic can grow into their current valuation based on our more realistic estimates," Fine said. "The shares seem to be trading on potential earnings and new business win momentum. But we think there is risk to this strategy."