Morningstar analysts rate advertising giant (WPP) as a four-star stock, as the company is trading below its fair value estimate of £15 per share.
We expect profit margin to increase slightly from the 12.5% range in 2017 to over 14% by 2024. We have not modelled significant changes in our 10-year average margins, as we believe WPP’s efficiencies in talent management will offset growth in compensation and slightly lower long-term margins on digital ads.
We anticipate minimal variations in gross margins from even to odd years, as growth in political media-buying during election years may push prices higher, which could lower demand from the commercial side.
Bull Points
- WPP's ownership of advertising and marketing companies includes some of the largest and best-known brands across multiple disciplines.
- Although the advertising environment is evolving, there always will be demand from companies to increase sales and brand value by creating and delivering advertising to consumers.
- WPP has a stronger presence in the faster-growing emerging advertising markets than most of its peers
Bear Points
- The retirement of the firm’s CEO, Sir Martin Sorrell, in April 2018 casts doubt over whether his successor can help the firm maintain its market leadership position
- Evolving technology and consumer preferences are forcing constant changes to the way goods and services are marketed. WPP's results could suffer if the firm can't adapt quickly enough.
- Clients continue to push for improved returns on their marketing spend, particularly in digital marketing. This push will only increase with the adoption of programmatic media.
WPP's Competitive Advantage
WPP is the largest player within the advertising space, operating in more than 110 countries worldwide. We expect the firm to maintain its market-leading position as it generates competitive organic growth, continues to make acquisitions, and increases focus on the faster-growing emerging and the overall digital ad markets.
We look for WPP’s acquisition growth strategy to continue, as the firm has consistently brought in smaller local ad agencies and quickly gained traction in other faster-growing international markets. Historically, WPP has also aggressively acquired larger players in the space such as Ogilvy, Young & Rubicam, and Taylor Nelson. Consolidation within the advertising space has resulted in the Big Five companies – WPP, Omnicom, Interpublic Group, Publicis Groupe, and Dentsu – generating nearly 30% of the world’s total ad revenue.
More recently, this consolidation has been driven by globalisation of businesses in various verticals, increasing demand not only for vertical-specific advertising expertise, but also for experience, knowledge, and clearer understanding of different cultures and regulations.
We also expect WPP to continue acquiring and investing in the growing digital advertising space, which will help the firm remain competitive. Clients of WPP and its peers are allocating more ad dollars toward below-the-line, or more targeted, digital campaigns, creating growth opportunities for WPP and other players in the space. Some of WPP’s acquisitions within the digital ad market include Taylor Nelson, 24/7 Real Media, and AKQA, along with investments in Essence and AppNexus.
Among its peers, we believe WPP is at the forefront when it comes to providing different components of digital advertising such as programmatic media buying and ad placement, along with performance measurement. As most of WPP’s larger clients favour omnichannel or multichannel marketing and advertising campaigns, these and further acquisitions and investments help make WPP a one-stop shop.
