EUR 850.00 For Business Accounts Only

Morningstar | WPP Reports Better-Than-Expected 4Q Results; Turnaround Likely in Late 2019; Shares Undervalued

While WPP’s fourth-quarter results displayed continued weakness in the North America market, they did provide a relief as overall organic net revenue declined a bit less than expected. The turnaround remains around nine months away; however, as mentioned in previous notes, we expect further indications of a recovery, such as improving organic sales in the U.S., to surface in the second half of this year. We expect the impact of WPP’s net account wins in late 2018 to bear fruit in late 2019. This quarter’s results along with the net wins, and according to the WPP, improvement in talent attained, display the effectiveness of the firm’s brand equity economic moat source. We are maintaining our GBX 1,450 per share fair value estimate of WPP. While the stock is up nearly 5% in reaction to the numbers, it remains attractive as this narrow-moat name continues to trade in 5-star territory. Also, at current levels, the dividend that WPP management maintained for 2019, is yielding 7%.

Fourth-quarter total net revenue dipped 0.7% as the 0.1% organic decline was accompanied by headwinds from dispositions and currency. Net revenue in North America, which represents around 35% of WPP’s total net revenue, declined 4.5% organically year over year as the firm remains in the midst of improving the creativity talent in that region. Weakness on the data side and lack of better integration of agencies on the healthcare side also contributed to the decline. The firm also saw organic decline in net revenue in the U.K., but mainly due to last year’s tougher comp. Other regions performed strongly as like-for-like net revenue in Western Continental Europe and the rest of the world grew 4.1% and 2.6%, respectively.

In terms of the business segments, advertising remained the weakest but was more than offset during the quarter by continuing growth in media planning and buying, as advertising and media investment management like-for-like net revenue grew 0.4%. Data investments was down 2.8% mainly due to weakness in North America. While WPP is in the process of selling Kantar (likely to be completed in the second quarter), within data investments, Kantar’s various agencies such as Kantar Worldpanel and Kantar Media did well, offset by poor performance of Kantar Health, Public, and Lightspeed. The firm’s brand consulting, health & wellness, and specialists communications services also declined. The only bright spot was WPP’s public relations and public affairs that increased 1.2% from last year. We expect gradual improvements mainly in advertising and media throughout 2019 as WPP focuses again on creativity to win additional ad accounts, mainly in the U.S.

As mentioned earlier, WPP is in the process of selling Kantar, which could be valued at GBP 4 billion. We note the company intends to maintain 30%-40% interest in Kantar. Throughout 2018, the firm did sell various holdings in companies such as AppNexus (which was acquired by AT&T in August 2018 for approximately $1.4 billion). The firm used proceeds from those transactions to strengthen its balance sheet as net debt was reduced to GBP 4 billion last year from GBP 4.5 billion in 2017. In our view, this strategy not only helps WPP improve its balance sheet but also sharpens the firm’s focus more on improving the core business--advertising, media planning, and buying. In terms of M&A, the firm expects to spend around GBP 200 million annually to acquire agencies, while it will continue to dispose of underperforming agencies.