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Morningstar | WPP Loses Ford Creativity to Omnicom, but Volkswagen Opportunity Remains; Both Stocks Undervalued

On Oct. 8, Ford Motor Company finally decided on which ad agencies it will work with going forward and chose Omnicom’s BBDO as its creative agency, displacing WPP. However, Ford did retain WPP as its media agency. While Ford’s decision will help Omnicom organic revenue growth in 2019, in our view, its negative impact on WPP revenue will not be significant. Plus, we must note that WPP has an opportunity to offset the effect of Ford’s decision, as it is one of the final three agencies pursuing the Volkswagen account. We have not adjusted our projections for Omnicom or WPP and are maintaining our per share fair value estimates of $85 and GBX 1,500 for the two firms, respectively. Omnicom and WPP are 4-star stocks, which we continue to recommend for investors.

We do not view the impact of Ford’s decision on WPP revenue as significant, as we estimate the firm’s revenue loss from that account likely represents around 1% of WPP’s total annual revenue. Going forward, we expect WPP to still generate approximately 80% of the revenue that was coming in from Ford, or $400 million (GBP 305 million), which represents the media side and is higher margin.

The near $100 million remaining from the Ford account, which is the automaker’s spending on creativity, will go to Omnicom as a result of this decision. That figure represents around 1% organic revenue growth for Omnicom in 2019.

We note that the creativity agencies of Omnicom and WPP, along with IPG, are also competing for another auto manufacturer account, Volkswagen, which was put under review in April 2018. While IPG and Omnicom are currently the creative agencies working with Volkswagen, in our view, Ford’s decision could possibly help WPP’s chances of landing this account. We think unlike in the past, Volkswagen may be reluctant to go with creativity agencies that service a major competitor, Ford. A Volkswagen creativity account win for WPP could more than offset the Ford loss, as annually, Volkswagen’s global ad spending is nearly 50% more than Ford’s, according to the AdAge Datacenter.

For WPP, we continue to expect only 0.3% organic revenue growth in 2018, followed by 1.2% in 2019. We have assumed a 2.4% 10-year CAGR in organic revenue for the firm. With some acceleration in top line growth in 2019, we expect the firm to realize operating leverage and gradually expand margin. We look for WPP operating margin to hit 14% by 2022 and to average around 13% during the next 10 years, above the 12% the firm reported for 2017.

Last, we have modeled 1.3% and 2.9% organic growth for Omnicom in 2018 and 2019, respectively. We expect Omnicom revenue to grow at an average annual rate of 3% during the next 10 years. In addition, we have modeled in a 10-year 13% average operating margin. We do not expect significant change in our 10-year average gross margins, as we believe Omnicom’s efficiencies in talent management (either per account or per project) will offset growth in compensation and the slightly lower long-term digital ad margins.