WPP Says 2012 Won't Be Bad For Britain

Published in Company Comment on 28 October 2011

The advertising giant gets excited about the London Olympics, UEFA football and a Presidential Election.

This year has been an annus horribilis for millions of Brits, largely because of shrinking disposable incomes. With consumers reluctant to spend and companies unwilling to invest and expand, the post-crash years have been pretty hard on advertising agencies and media companies across the globe.

However, WPP Group (LSE: WPP) -- the world's largest communications services group, with over 112,000 people in 2,400 offices across 107 countries -- has fared better than most. In fact, under the stewardship of its widely admired chief executive, Sir Martin Sorrell, WPP is firmly on the road to growth.

In a trading update for the third quarter released this morning, WPP reported quarterly revenues up 9% to nearly £2.5 billion. Like-for-like revenues were up 5% and WPP's gross margin rose 6%. 

When both revenues and gross margins rise together, this produces a powerful 'double boost' for businesses, so these figures should encourage WPP's shareholders.

Going for growth

In a now-familiar tale, WPP revealed that growth was strongest in fast-growing emerging markets. Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe improved revenues by 12%. In these regions, China (27%), India (10%) and Singapore (12%) were WPP's star regions.

In the US, revenue growth was 5%, down from 6% in the second quarter. In the UK, growth was a surprisingly healthy 9%, up from 7%. In Western Continental Europe, revenues were robust, partly driven by acquisitions. France and, particularly, Greece, Portugal and Spain showed slow growth.

Looking ahead to 2012

One encouraging sign for WPP is that net new business billings of £1.4 billion last quarter were "well up on the same quarter last year", as the FTSE 100 firm benefits from industry consolidation.

As for next year, the signs already look encouraging. WPP claims that,

"To date, we have seen little, if any, impact of six global risks -- feared euro contagion, lack of attention to the US deficit, rising commodity prices, the impact of the tragic events in Japan, uncertainties caused by the Arab Spring and, finally, the possibility of the withdrawal of the post-Lehman fiscal and monetary stimulus -- on client spending."

Nevertheless, the ad giant then goes on to warn,

"However, the continuous macro-economic gloom and despair in the media and elsewhere must have some impact on both corporate and consumer confidence. As a result, the marginal hire or investment by uncertain CEOs and Boards and marginal purchase of a car or house or holiday or domestic appliance by worried consumers must be affected."

WPP describes next year as a 'maxi-quadrennial year', thanks to a triple boost expected from the London Olympics, the 2012 UEFA European football tournament and, late in the year, the US Presidential Election.

Although WPP expects world economic growth to be around 3% to 3.5%, the group expects its industry to expand by a tidy 4% next year, boosted by these three headline-grabbing events. It remains less confident about 2013, warning,

"We remain of the view that 2012 will not be the really challenging year. It is likely that European politicians will just about muddle through the current euro-zone crisis. The rubber is really likely to meet the road, however, after the US Presidential Election in late 2012 and into 2013, when a newly elected American President will finally have to deal with the US deficit. We remain attracted to the "LUV" analogy, with an increasing emphasis on the "L" indicating the long slog in Western markets, in particular."

Valuation

As I write, WPP shares are up more than 1% at 685p, valuing the group at £8.6 billion. Net debt of £3 billion accounts for 35% of WPP's market capitalisation, so the firm is fairly lightly geared.

At this price, WPP shares trade on a forward price-earnings ratio of 10.8 and offer a dividend yield of 3.3%, covered three times. If the company succeeds in its goal of improving operating profits by 10% to 15% a year, then its shares are definitely a buy at this price.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

theRealGrinch 28 Oct 2011 , 5:03pm

why are WPP paying Sorrell quadrillions, when they have billions of debt?

richjfool 29 Oct 2011 , 2:49pm

And I believe 7 years of dividend increases.

jackdaww 30 Oct 2011 , 1:24pm

i got out of WPP mainly because ot their arrogant fatcats mentality.

not logical investment wise but i feel better for it.

eccyman 31 Oct 2011 , 12:49pm

I became an accidental shareholder in WPP via a holder in Taylor Nelson. Overall all I'm pleased with my investment and WPP are good for UK(plc). My only reservation is that they seem too tied in with Martin Sorrell and wonder what'll happen if he falls under a bus?

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