GroupM's New Client Wins Like Amazon Will Improve Future Performance

Key Takeaways

• WPP's investment in AI and operational efficiencies aims to boost revenues and margins through enhanced insights and streamlined operations.
  
• Strategic client wins and structural cost savings are expected to drive sustainable revenue growth and protect margins even amid challenging environments.
  
• Declining revenue and challenges in China, along with financial constraints and economic uncertainties, could hinder WPP's growth and financial flexibility.

Catalysts

A creative transformation company, provides communications, experience, commerce, and technology services in North America, the United Kingdom, Western Continental Europe, the Asia Pacific, Latin America, Africa, the Middle East, and Central and Eastern Europe.

• WPP's investment in AI and data through its WPP Open platform is poised to enhance efficiency and effectiveness across the organization, potentially increasing both revenue and net margins as the company capitalizes on AI-driven insights and efficiencies.
  
• The anticipated ramp-up of recent client wins, such as Amazon, J&J, and Unilever, particularly in GroupM, is expected to positively impact revenue growth in the latter half of 2025, counteracting first-half headwinds from historical client losses.
  
• Structural cost savings initiatives have already contributed to margin improvement in 2024, and these savings are projected to continue into 2025, which could protect or improve net margins even in a challenging revenue growth environment.
  
• The completion of network consolidation and simplification is expected to streamline operations and enhance client service delivery, potentially driving revenue growth and improving operating efficiency, thereby positively impacting net margins.
  
• The focus on client retention and new business wins, supported by strategic priorities like enhanced data strategy and innovation at GroupM, is expected to drive long-term sustainable revenue growth and improved earnings performance.

WPP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WPP's revenue will decrease by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 5.4% in 3 years time.
• Analysts expect earnings to reach £552.9 million (and earnings per share of £0.54) by about August 2028, up from £542.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £740 million in earnings, and the most bearish expecting £430.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, up from 8.0x today. This future PE is lower than the current PE for the US Media industry at 13.5x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.72%, as per the Simply Wall St company report.

WPP Future Earnings Per Share Growth

Risks

• WPP reported a decline in revenue less pass-through costs and a decrease in overall reported revenue, indicating potential challenges in achieving consistent revenue growth. (Impact: Revenue)
  
• The company's performance in China posed a significant challenge, contributing a 20.8% decline, which represented an 80 basis point drag on revenue, and continued uncertainty could impact future revenue growth. (Impact: Revenue)
  
• Weakness in project-based work, particularly at critical agencies like AKQA, led to a decline in creative agency performance, highlighting a vulnerability to client discretionary spending patterns. (Impact: Revenue and Net Margins)
  
• Increased net finance costs due to higher interest rates and bond refinancings, alongside a flat effective tax rate, could constrain future net earnings, limiting financial flexibility. (Impact: Earnings)
  
• A cautious outlook for 2025 with guidance indicating flat to negative like-for-like growth reflects uncertainty in macroeconomic conditions, which may hinder revenue and margin improvement. (Impact: Revenue and Net Margins)

Valuation

• The analysts have a consensus price target of £4.633 for WPP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.5, and the most bearish reporting a price target of just £3.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £10.2 billion, earnings will come to £552.9 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 9.7%.
• Given the current share price of £4.02, the analyst price target of £4.63 is 13.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.