EUR 850.00 For Business Accounts Only

Morningstar | WPP’s VMLY&R Is Attracting New Clients and Maintaining Current Ones as It Has Become a One-Stop Shop

After attending a presentation by WPP’s VMLY&R ad agency, we remain confident in WPP’s ability to progress toward organic growth near the end of this year or beginning of 2020. In our view, VMLY&R is an example of WPP’s strategy to combine its digital and creativity. Plus, VMLY&R and its peers under the WPP umbrella appear to have successfully combined consultancy (technology and strategic) know-how with advertising (creativity and media buying). The agency has maintained some of its largest clients, while adding some well-known ones this year. Our GBX 1,450 per share fair value estimate of WPP remains intact. While we concede that patience is required for this 5-star Best Idea stock, this narrow-moat name is paying a dividend that is yielding over 6% at current levels.

VMLY&R is the combination of VML (mainly a business strategy and consulting provider, which WPP acquired in 2001) and Y&R (a marketing and communications company, acquired by WPP in 2000). Similar to how Wunderman and JWT were combined to become Wunderman Thompson in 2018, Y&R joined VML last year to integrate and maximize capabilities including creativity, data analytics, and digital transformation. The firm has utilized expertise in each to win and maintain clients such as Ford, Wendy’s, Danone, Pfizer, FedEx, U.S. Navy, New Balance, and more. With such an approach, which is like those of many other WPP agencies, combined with the agencies’ brand equity, we think WPP is well positioned to not only enhance the creativity and digital service but to also benefit from the horizontal integration of its agencies.

On the creativity front, one of VMLY&R’s largest accounts, Wendy’s, began working with the agency in 2013. Creativity entails not just the design of Wendy’s various campaigns but also the creative method of communicating with consumers, resulting in consumers bringing attention to the brand and its products the way they prefer. In other words, using creativity, VMLY&R successfully initiated what is considered a word-of-mouth marketing campaign for Wendy’s on Twitter. For example, Wendy’s launched a campaign full of sarcasm and humor on the Twitter platform, which resulted in one of the most re-tweeted tweets ever. According to VMLY&R, the campaign resulted in more than 200,000 new Twitter followers, and nearly 24 million Twitter users started looking at Wendy’s profile on the platform.

While creativity for the Wendy’s account was the work of VMLY&R, the same agency also led the way on the activation of it on the social media. In fact, VMLY&R has been Wendy’s digital agency since 2012. Behind such work was the ability to conduct data analytics. With access to various third-party data, VMLY&R has in real time adjusted its messaging to accommodate dynamic change or preferences it sees in user behavior. In other words, VMLY&R has been able to provide a clearer picture of current or potential customer experience on various platforms to its clients, including Wendy’s.

As we mentioned in our December 2017 Select report, creativity remains a very important component of the ad holding companies’ services. In fact, consulting firms that are still trying to grab market share have been willing to pay a high premium for creative ad agencies. For example, according to an AdAge article published on May 24, Accenture may have paid $475.5 million for Droga5, possibly representing over 2.5 times 2018 revenue. Our GBX 1,450 valuation of WPP (representing a 50%-plus upside), which has some of the most well known and respected creative agencies, represents only 1.5 times the firm’s 2019 revenue.

What also impressed us during the VMLY&R presentation was the agency’s consulting services for its clients. VMLY&R has demonstrated its ability to attract clients seeking consulting on digital and strategic transformation, while also helping with advertising and marketing campaign designs, creations, and launches. For example, while WPP lost a bit of its largest account, Ford (but maintained at least 80% of the net revenue it generates annually), it appears that VMLY&R’s work on Ford (which was part of WPP’s GTB in Detroit before the review began) was not reviewed, demonstrating Ford’s ongoing confidence in the agency. VMLY&R has helped Ford design the Ford Pass app that not only makes it easy for consumers to shop for and purchase Ford’s automobiles but also tracks and helps improve a consumer’s digital experience with Ford vehicles, thereby enhancing the Ford brand. The app communicates directly with the user-owned Ford vehicles. Some features include receiving fuel and mileage driven updates. Vehicle owners can also lock, unlock, and start or turn off engines remotely. They can also determine the vehicle’s location. Plus, the app provides miles driven and how they relate to car maintenance, which can also be scheduled with dealers or other car mechanics or repair shops nearby. As expected, the app also provides users the option to request and receive roadside assistance at any time. The agency has provided consulting and technology-focused services such as website management and other app designs for other accounts as well, including Wendy’s.

The agency’s capability of in-house video production and media buying was also impressive. While VMLY&R also works with third parties to produce videos, it has its own production studio. VMLY&R also does the media buying for its clients; however, when it comes to very high volume buying, it does rely on its parent company’s GroupM, similar to other WPP agencies.

According to VMLY&R management, these capabilities may lead the firm to generate nearly $945 million (or nearly GBP 1.2 billion) in net revenue this year, which represents over 9% of WPP’s total net revenue. We think VMLY&R could generate organic growth between 1% and 2% in 2019, which may be indicative of its parent company further progressing toward organic growth by the end of this year or in 2020.

Regarding short-term catalysts for the WPP stock, negotiations on the sale of Kantar continue. As we have mentioned previously, and according to a Bloomberg report on April 26, the remaining bidders for that business are now Bain Capital and Apollo Global Management. According to Reuters, Vista Equity Partners may be another bidder. The price that WPP is seeking is reported to be around GBP 3 billion. If we assume that Kantar represents most of WPP’s data investment management business, then such a transaction represents 1.2 times 2018 Kantar revenue, which is similar to the trailing 12 months revenue multiple that our GBX 1,450 fair value estimate of WPP represents. From an EBITDA standpoint, the GBP 3 billion for all of Kantar is 8.3 times that segment’s trailing EBITDA, while our valuation of the entire firm is 9.6 times, as it includes the higher margin media business. WPP plans to use proceeds from the possible deal (which could be around GBP 2 billion, as the firm plans to keep around 40% of Kantar) to further strengthen its balance sheet.

The other catalyst could be the possible sale of WPP’s retail ad selling business Triad to Target, which was reported last week by The Wall Street Journal. We note that Triad is only an ad selling platform, which only helps retailers sell more of their online real estate to advertisers. The sale of Triad may be well received by the market as it will not impact WPP’s overall revenue, while it could allow the firm to further improve its balance sheet or conduct additional share repurchase.