Stockwatch: why WPP’s warning matters for all investors

After slumping to a 16-year low, the debate shifts to whether the stock has fallen far enough. Analyst Edmond Jackson looks at this question and other possible outcomes.

15th July 2025 10:38

by Edmond Jackson from interactive investor

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How significant is another profit warning from FTSE 100 marketing services group WPP (LSE:WPP) who just admitted that June performance was worse than expected amid “macro pressures intensifying”?

Economists did suggest it could take some months for the disruptive effects of Trump’s tariff shenanigans from early April to manifest. Yet stock market investors have been lulled into complacency after a “buy the drop” approach after April’s slump was affirmed and many shares were then chased to record highs.

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Advertising and recruitment have historically been forward indicators of business prosperity, and the likes of Hays (LSE:HAS) and PageGroup (LSE:PAGE) cautioned ahead of WPP. Hays cited lower activity in its fourth quarter to 30 June “reflecting low levels of client and candidate confidence as a result of macroeconomic uncertainty” – albeit mainly in permanent whereas temporary and contracting were more resilient. On 10 July, PageGroup declared gross profit down 14% in permanent but also 10% in temporary, although it did allege improvement in Asia and the US.

Definite downturn from second quarter of 2025

After the first three months of the year showed WPP’s like-for-like revenue 0.7% softer and a 25 April update looked for an improvement in the second half year, on 9 July we heard about a near 6.0% decline in the second quarter. The US, where nearly half of operating profit derives, has changed from flat revenue in the first quarter to joining the general single-digit percent fall in the second.

WPP is not itself directly affected by US tariffs but management has expected them to impact various clients and the US economy.

Market bulls dismiss WPP’s upset on grounds its cumulative acquisitions and circa £12 billion revenue (consensus for 2025) make it an unwieldy dinosaur exposed to AI supplanting many of its services. Furthermore, US tech-giants have used their digital and AI powers to muscle in on advertising.

Last week’s update still to me chiefly reflects adverse economic change. Relative to other cyclical shares, the market is being negative on WPP given the share price fell from 530p to 430p after last week’s update. Yesterday, this trend continued with a 6p decline to 415p, but that has reversed to 421p in early dealings Tuesday.

Source: TradingView. Past performance is not a guide to future performance.

It’s unclear what extent of downgrades are due – or already part-reflected – in consensus for just over £800 million net profit this year on around £11.7 billion revenue, with only a 1% slip to revenue/profit in 2026. This implies a forward price/earnings (PE) ratio of only 5.6x and, even if the dividend falls 20% to 34p as expected, the yield of 8.1% would be twice covered.

WPP also has a strong free cash flow record in support of payouts, although critics say the shares have fallen while the yield has gone from 6% to 8%. But if a new CEO from September can wrest improvements in digital, then the shares could be at or approaching a turning point.

Restrictions on director dealings probably do now apply until the August half-year results, despite the update having provided quite some detail. Yet insiders have tellingly been reticent to back the shares; the trend going back to 2023 has been share option exercising and selling (enough if not more, to settle tax arising on nil-cost options) which is nothing like risking real money.

The institutional trend has shown six additions to disclosed holdings since May, with only T.Rowe Price trimming by 4.3% in early June. For now, that looks the more astute stance versus a majority possibly snared into averaging down.

An adage does say, among the riskiest of shares are those appealing on “value” criteria ahead of an economic downturn. With WPP now trading around levels back in April 2009, off Global Financial Crisis lows of 330p, this does however significantly price in global slowdown and structural risks with WPP.

How significant is appointment of new CEO?

Existing CEO Mark Read has been in the role nearly seven years and looks a casualty of the former BT boss Philip Jansen incoming as chairman from last 1 January. There is concern that WPP is losing revenue due to its competitive offering - among accounts lately lost have been Coca-Cola and Paramount media in the US. There are also worries that the holding company struggles with duplicated overheads at the head office and within agencies, which compromise margin. It did however recover to 9% at the operating level last year.

WPP has also been investing in AI, data and technology, with annual investment of around £300 million this year after £250 million in 2024.

The choice of Cindy Rose as new boss looks very good, hence the shares did blip around 20p on 10 July news of her appointment from 1 September. She is chief operating officer of Microsoft’s global enterprise division and has been a WPP non-executive director since 2019, which can seem a quasi-internal promotion rather than a truly fresh perspective, but the selection did include external candidates and Rose is credited with “digital transformation of large enterprises around the world.”

Obviously, in the short term, a new CEO is not going to influence how WPP clients feel about how their account is being managed. And this is not a software company. Read was already simplifying WPP’s structure, and the question is how radical Rose will get to further hone one efficient group rather than a conglomerate – where not unsurprisingly a discount to value looks manifest.

Despite an extent of rationalisation, the end-2024 balance sheet had nearly £1.7 billion net debt (excluding £2.0 billion leases), moderately down on £2.5 billion at end-2023 due to a 66% cut in near-term debt. There were nearly £1.9 billion of net current liabilities, although £2.6 billion cash mitigates that risk.

Net finance costs took 21% of annual operating profit. While hardly at crisis levels, this debt is a burden which, including leases, represents around 100% gearing on £3.7 billion net assets, of which 224% constitutes goodwill and intangibles due to an acquisitive history of people and technology-driven businesses. It looks a continued long haul to transform such a balance sheet.

WPP - financial summary
Year-end 31 Dec

	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024
Turnover (£ million)	11,529	12,235	14,389	15,804	13,047	13,234	12,003	12,801	14,429	14,845	14,741
Operating margin (%)	13.6	13.2	14.2	12.1	9.2	9.4	-20.2	9.1	8.5	3.8	9.0
Operating profit (£m)	1,569	1,610	2,048	1,909	1,196	1,248	-2,424	1,167	1,224	565	1,321
Net profit (£m)	1,077	1,160	1,400	1,817	1,063	844	-2,967	638	683	110	542
Reported earnings/share (p)	80.5	88.4	108	126	73.9	67.3	-243	52.5	61.2	10.1	49.4
Normalised earnings/share (p)	91.6	92.0	103	140	99.0	81.3	-50.5	69.3	83.6	78.6	79.4
Operating cashflow/share (p)	127	104	137	110	134	147	168	167	62.8	113	128
Capital expenditure/share (p)	16.0	18.8	22.0	25.6	29.7	31.3	22.3	24.1	20.0	19.9	21.5
Free cashflow/share (p)	111	84.8	115	84.8	105	116	146	143	42.8	93.3	107
Dividend/share (p)	38.2	44.7	56.6	60.0	60.0	22.7	24.0	31.2	39.4	39.4	39.4
Cash (£m)	2,513	2,382	2,437	2,391	2,643	11,306	12,899	3,883	2,492	2,218	2,638
Working capital (£m)	-80.2	-840	-1,322	-358	-666	-298	755	-1,150	-2,610	-2,307	-1,855
Net debt (£m)	2,275	3,211	4,131	4,483	4,017	3,789	2,852	2,943	4,690	4,658	3,710
Net assets per share (p)	569	590	728	747	744	630	386	313	344	314	322

Source: historic company REFS and company accounts.

Risk/reward tilts positively unless economies lurch lower

The chief risk looks to be continued weakening economic data which then conspires with WPP’s structural dilemmas to generate another profit warning.

But I note at least three “wouldn’t touch WPP with a bargepole” comment pieces this week and none even faintly positive, hence jaundiced sentiment.

Properly, we need to see more operating updates and published conclusions of a new CEO’s strategic review, including any new actions. Buying right now is speculative.

It would still need a far worse scenario to prompt more than a 20% cut in the dividend as already expected, to rate “sell”. After the shares have fallen 22% in a week, they are broadly pricing in what is known. I think “hold” is overall appropriate and WPP well worth monitoring as a contrarian “buy”.

Mind, in August 2020 when WPP asserted it was “over the trough” for revenue and a 10p interim dividend had been declared (versus none expected, post-Covid), I rated the shares “buy” at 610p due to expectations for a dividend over 45p in 2021, hence a 7.5% yield. The shares did double by 2021 but fell overall thereafter despite the payout rising to 39p per share from 2022.

Such are challenges with bottom-picking. A prospective price/sales ratio around 0.4x implies scope for a turnaround, and if the new CEO is not swift enough then it is possible that WPP attracts an activist investor pushing for radical action.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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