Global advertising giant WPP (WPP) is trading at a 15% discount to its long-term average price-to-earnings (PE) ratio of 12.9 after a disappointing first six months of 2017.

In our view a PE of 10.9 represents an excellent opportunity to buy a quality company which is one of the leading players in its sector. However, investors must take a long-term view given market sentiment is currently weak towards WPP.

Downgrades disappointing but not terminal

The company’s recent struggles do not represent a fundamental shift within its industry as some observers fear.

We expect net new business wins to drive an improved second half with major sporting events to come in 2018 which could help lift performance.

Share buybacks should also provide some support to the shares which are further underpinned by a 4.5% dividend yield.

Why is sentiment poor?

On 23 August WPP downgraded its growth guidance for the second time this year buffeted by pressure on client spending ‘particularly in the fast moving consumer goods or packaged goods sector’.

Also blaming growing economic uncertainty amid a rise in populism in the UK and US and ‘bumpy’ growth in Brazil, Russia and China, WPP now expects sales growth of 0% to 1% compared with previous forecasts of 2% at the first quarter stage and 3% at the beginning of 2017.

Even this muted performance relies on a recovery from a 0.9% decline in like-for-like sales year-to-date.

Better to come from the company?

WPP has tough comparative figures to beat this year. Its 2016 results were underpinned by the Rio Olympics and the US elections. There are no such major events this year but next year is likely to be a different story with the football World Cup in Russia and the Winter Olympics in South Korea.

Estimated net new business billings of $4.2bn were won in the first half of 2017 against $2.99bn in the same period last year.

This shows the amount of new business from existing and new clients minus any business lost. The performance should bode well for the required second half recovery.

Comments from Unilever (ULVR) alongside first half results suggested fears companies are less committed to advertising spend are overdone.

The consumer goods business, WPP’s second biggest client, guided for a year-on-year increase in marketing spend in the second half after scaling back in the first six months of year. This may also have the effect of forcing competitors to react in turn, leading to a more widespread boost in advertising spend.

‹ Previous2017-08-31Next ›