Opinion: WPP’s Dysfunction Discount Is Now Too Slim

Auggie Capistrano Last Updated Jul 02, 2019 (0) comment

Investors are giving new WPP Chief Executive Mark Read the benefit of the doubt. The company’s shares rose 7 percent on Friday after mediocre results, giving the ad group formerly headed by Martin Sorrell an 11.8 billion pound market value. Its heavy debt load, shrinking top line and the need to restructure mean that’s probably a bit overdone.

London-based WPP’s 2018 sales fell 0.4 percent compared with a year earlier, after stripping out the effects of currency fluctuations, disposals and revenue that goes straight to third parties. That was slightly better than analysts’ expectations of a 0.6 percent fall. Read is also touting a “stronger, more integrated, more tech-enabled” agency primed to win big clients from the likes of France’s Publicis and U.S. rivals Omnicom and IPG.

WPP has long traded at a discount to Europe-based peer Publicis, partly because of slower growth and partly because of the leadership uncertainty prompted by Sorrell’s exit last April after misconduct allegations, which he denied. But that discount has narrowed considerably. After Friday’s surge, WPP is trading at 9.4 times its 2019 earnings, using Refinitiv estimates – just 10 percent below Publicis’ 10.4 times multiple. Back in April the gap was twice as large.

Read’s restructuring plan – which includes selling assets and merging its many sprawling subsidiary ad agencies – is indeed reassuring. But he himself is flagging the risk of a 2 percent sales shrinkage in 2019. And factoring in the two companies’ growth rates, WPP still looks expensive. Analysts are pencilling in average annual earnings growth of 1 percent in 2020 and 2021 for WPP, using Refinitiv data. Publicis, on the other hand, is expected to see its earnings rise at an average 6 percent annual rate over the same period. Adjust their valuations for those rates, and WPP’s so-called price-earnings to growth multiple is a punchy 10.6 compared with Publicis’ 1.7. Investors are placing a lot of faith in Read’s tub-thumping.

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CONTEXT NEWS

– WPP said on March 1 its revenue excluding pass-through costs declined 0.4 percent in like-for-like terms in 2018. Analysts had on average been expecting a 0.6 percent fall, according to company-compiled consensus forecasts as reported by Credit Suisse.

– The London-based ad agency expects like-for-like revenue excluding pass-through costs to fall by between 1.5 and 2 percent in 2019. Barclays analysts said that the consensus forecast was for a 1.8 percent fall.

– WPP shares were up 7 percent to 8.82 pounds at 0900 GMT.

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