Seeking Alpha • Oct 31
WPP: Looking Cheap For A Global Ad Giant
Summary
WPP plc reported revenue growth in its most recent quarter and raised its full-year revenue forecast.
Longer term, I expect WPP to suffer from an advertising downturn.
But I think the long-term strengths of the business make the current price attractive and I retain my "buy" rating.
U.K.-based advertising holding group WPP plc (WPP) has so far not shown much negative impact from advertising slowdowns reported by other companies. I expect that to change in due course, but continue to be upbeat about the firm’s long-term prospects.
I last covered the name in July with my bullish note WPP: Price Decline Offers Value. Since then, the shares have fallen 11%.
Performance remains solid for now
As recent U.S. tech share markdowns have shown, advertising is clearly starting to show some impact from customers tightening their belts.
Last week, WPP released its third quarter results. They showed that, for now at least, revenue has been more than holding up.
company quarterly results announcement
Source: company quarterly results announcement (footnotes omitted)
The announcement said,
We enter the last quarter of the year with confidence, based on the leading competitive position of our businesses, our client momentum and the knowledge that the actions we have taken to strengthen WPP leave us well placed to support our clients in navigating the economic uncertainties ahead.
In fact, the company’s bullishness is shown by the fact that it raised its full-year revenue guidance. However, at the same time, the company adjusted its forecast headline operating margin improvement target to 30-50 basis points, compared to around 50 basis points previously. While that may sound relatively minor, I see it as a sign that while inflation may be helping the company to build revenue by increasing billing rates, for example, it is also adding costs that could slow margin improvement.
Western continental Europe already saw revenue contraction in the third quarter on a like-for-like basis (of 2.1%). If that slowdown also shows itself in other markets, such as North America (which reported 4.7% like-for-like growth in the last quarter), the current bullishness could turn out to be short-lived. Even if 2022 comes in line with expectations, 2023 may turn out to be more challenging. The North American figure is already down sharply from the second quarter figure of 12.7%.
The company – which reports in pounds – has also benefitted in its reporting from recent sterling weakness. Revenue growth of 10.3% year-on-year in the third quarter turns into only 1.4% when exchange rate impacts are excluded.
I still think WPP deserves credit for a solid performance in an increasingly challenging market. But I also see grounds for concern that the business could weaken in 2023, with a combination of low revenue growth or revenue contraction and cost inflation.
WPP retains long term strength
But while the short- to medium-term outlook may seem relatively unexciting, I think the long-term investment case for WPP remains attractive.
It has a leading collection of advertising agencies, which can continue to form the basis of long-term financial success. The company has also been expanding its digital footprint in recent years to reflect (arguably belatedly, but better late than never) the leading role that digital media now has in the advertising market.
Unpacking an exact number for this is difficult, but in its interim results, the company said that, “Faster growth areas of experience, commerce and technology around 39% of revenue less pass-through costs in Global Integrated Agencies ex-GroupM in H1.”Seeking Alpha • Jul 26
WPP: Price Decline Offers Value
WPP had a strong first quarter and momentum looked set to continue.
WPP shares, however, have been falling despite improving business performance and long-term growth drivers.
I see the current WPP share price as an attractive entry level and maintain my "buy" rating.
Advertising network WPP plc (WPP) is due to announce its interim results on 5 August. I expect positive news after a strong first quarter. The shares have been falling back lately, but I think the industry giant is attractively priced and continue to attach a “buy” rating.
Business Continues to be Buoyant
In its first quarter results released on 27 April 2022, the company reported like-for-like revenue growth of 8.1%.
company announcement
This continues a return to form over the past couple of years. The business performed positively across all geographies and internal business sectors.
company announcement
The WPP story is no longer as fresh or exciting as it once was, but I think it is easy to forget that when it works, it works very well. The company’s global reach and wide range of capabilities helps it win and keep very large client accounts. In the past couple of years, the company has continued to work to improve its digital proposition, for example recently launching a digital commerce managed service that will offer brands a fully outsourced direct-to-consumer ecommerce solution.
WPP’s move into more and more digital work keeps it relevant for an evolving advertising market, but at the same time its full range of traditional capabilities is what a lot of clients want, and I expect will continue to want. The first quarter saw WPP win $1.8 billion of net new business, including from Mars (where it became the global media partner), JDE Peet's, and Sky. It has also announced several acquisitions in recent weeks.
Risks at WPP
One reason WPP shares have been falling lately is the expectation that an economic slowdown could lead to advertisers cutting budgets, hurting the group. I do see that as a risk. The company did not make much of it in its upbeat outlook contained in the earnings statement, other than to note, “Given the uncertain global environment, we remain ready to respond to any changes in the economy as the year progresses.” It noted that, after client demand was well ahead of expectations in the first quarter, it stayed strong going into the second quarter.
Net debt at the end of the first quarter also looked high to me, at £2.6 billion. The company said that was due to seasonal net working capital movements and share purchases, but if the share repurchase scheme substantially increases net debt then I see it as adding to the company’s balance sheet risks.
Valuation Looks Attractive
Since my March piece, WPP: Return To Growth And An Attractive Valuation, when I upgraded the stock to “buy”, its price has fallen 17%. Shares are down 28% since February.
Google Finance
WPP has now moved back to below where it was heading into the pandemic. But it is in far better shape now than it was then, in my opinion. It is leaner, no longer flailing following the exit of Sir Martin Sorrell as it was then and is reshaping itself to meet market needs better. While the dividend is only a little over half what it was in 2018, it is firmly in growth mode, with a 30% increase last year.
