ii view: tough for ad agency WPP but AI is promising

First-quarter update to 31 March

• Adjusted like-for-like (LFL) revenue down 1.6% to £2.68 billion
• Adjusted net debt up 1.8% from a year ago to $4 billion

Guidance:

• Continues to expect full-year adjusted like-for-like revenue of between 0 and +1% 
• Continues to expect full-year headline operating profit margin to improve by between 0.2% and 0.4%

Chief executive Mark Read said:

“Our outlook for the full year is reiterated. We remain on track to return to growth in the balance of the year, supported by an encouraging new business pipeline and the strength of our business creatively and in media, both powered by new AI capabilities, while our simpler structure will drive organisational flexibility and stronger cash conversion.”

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ii round-up:

Major global advertising company WPP (LSE:WPP) today detailed a decline in quarterly revenues but maintained its full-year forecasts for potential growth in sales and profit margin.  

First-quarter adjusted revenue fell 1.6% year-over-year, marginally missing City estimates for a drop of 1.5%. The decline came against a strong first quarter of 2023, although new business wins with the likes of AstraZeneca (LSE:AZN) and Rightmove (LSE:RMV) are fuelling hopes for growth in annual sales of up to 1%. Ongoing cost cutting initiatives underpin a potential 0.4% improvement in the profit margin. 

Shares in the FTSE 100 company fell 1% in UK trading having come into this latest news up around 7% year-to-date. That’s less than the 10% improvement for ad driven ITV (LSE:ITV). The FTSE 100 index itself is up 4% in 2024.  

WPP’s services include core communications such as media ad buying and planning along with Public Relations. WPP, which owns agencies such as Ogilvy, Finsbury and Mindshare, continues to push artificial intelligence, or AI initiatives including a recent collaboration with Google owner Alphabet Inc Class A (NASDAQ:GOOGL). 

Key US sales, accounting for 38% of overall revenues, fell 5.4% during the quarter, hindered by reduced spending from technology clients and the loss of Pfizer Inc (NYSE:PFE). 

Asia Pacific sales, generating 28% of revenue, retreated 3% with a 15% fall in China partially countered by a 6.6 increase in India. Interim results are likely to be announced in early August. 

ii view:

Originally a maker of wire baskets and teapots called Wire and Plastic Products, WPP today operates in more than 100 countries employing over 100,000 people. Global Integrated Agencies taking in ad-related services generate most of its revenues at around 85%, followed by Public Relations at almost 9% and other Specialist agencies the balance of around 6%. Clients include 303 of the fortune 500, with names such as Nestle SA (SIX:NESN), Molson Coors Beverage Co Shs -B- Non-Voting (NYSE:TAP), and Telefonica SA (XMAD:TEF) on its books. 

For investors, corporate ad spending budgets remain squeezed by elevated borrowing costs. Curtailed spending for technology clients following investment booms during the pandemic remain a feature. Costs for businesses generally and including wages are now elevated, while the West’s strained relationship with China should not be ignored.

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On the upside, diversity in terms of both product and geographical region exist. Work aided by AI is now being done for some clients, a focus on reducing costs continues, while a forecast dividend yield of over 4.5% is attractive.

In all, and with a first US rate cut happening later than expected, room for caution persists. That said, a consensus analyst estimate of fair value at over 860p per share and an eventual economic recovery may well convince fans of this cyclical ad-giant to remain patient. 

Positives: 

• Diversified product and geographical offering
• Attractive dividend (not guaranteed)

Negatives:

• Advertising demand is historically cyclical
• Foreign exchange movements can hinder

The average rating of stock market analysts:

Hold