WPP’s (WPP) first-half 2017 results were mixed as the advertising group unexpectedly posted a decline in organic revenue mainly due to weakness in some of its major developed markets.
According to chief executive Martin Sorrell, a combination of lower GDP growth, low inflation, less pricing power, and increasing cost control, is forcing some firms to lower their spending on marketing, which impacts the growth rates of WPP and its peers.
WPP shares declined 10% in reaction to the disappointing results and CEO Martin Sorrell’s comments about the state of the global economy. With such a pullback, those shares are becoming more attractive as they are now trading in four-star territory, which means that Morningstar equity analysts believe they are undervalued.
Our fair value estimate for WPP shares is £16.40, against a current price of around £14.50. In addition, at current levels, the stock’s dividend represents an attractive 4% yield, in our view.
A few positive things stood out from the first-half results, in our view. First, WPP does expect acceleration in global ad spending in 2018, after a slowdown in 2017. The firm projects global ad spending to grow 3% and 4.3% in 2017 and 2018, respectively.
Second, while the firm lost the AT&T and Volkswagen accounts last year, it kicked off 2017 with strong net account wins. Potential revenue from its new business wins during the first six months are 42% higher than potential revenue from wins in the same period last year.
We expect to see the positive impact of those wins in the firm’s 2018 revenue. Third, WPP continues to make headway on the digital front, which remains the primary growth driver in ad spending. Over 40% of the firm’s revenue was from digital advertising, and we expect that figure to increase going forward – we view this as positive given that many firms are more likely to invest in the more easily measurable digital marketing campaigns.
While we agree with Sorrell’s view and had previously modelled low real GDP growth assumptions, we note that geopolitical factors surrounding the Trump administration and governments of other nations, especially in Europe, are also forcing larger firms to possibly reduce their marketing spending. Sorrell did mention that many companies may no longer expect some of Trump’s economic policies, including the corporate tax reform plan, to be implemented, given the lack of success in reforming Obamacare, in addition to what appears to be some instability currently in the White House.
In our view, companies such as WPP, Omnicom, IPG, and Publicis, have responded well to such headwinds as they have not aggressively cut prices, and have been streamlining their operations, resulting in bigger margins. We expect these to expand in the next 10 years.
