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magazineTriple whammy of bad news for WPP
We added advertising business WPP (WPP) to our Great Ideas portfolio in August after the shares fell sharply on a profit warning alongside its first half results.
We continue to view the discount to its long-term average price-to-earnings (PE) ratio as an attractive entry point into a quality stock but acknowledge the news flow so far has not been encouraging.
In early October it emerged that partner Japanese agency ADK was looking to break ties with the company by entering private equity ownership.
Then a couple of weeks later the company was hit by a triple whammy of bad news.
Smaller rival Publicis posted third quarter sales below forecasts and pointed to a challenging market. Like-for-like sales were up 1.2% to €2.26bn against consensus forecasts for €2.34bn.
It also emerged pay-TV giant Sky (SKY) was launching a review of its advertising budget for the first time in 13 years. WPP has fulfilled a lot of that work over the period.
Finally, consumer goods giant Unilever (ULVR), WPP’s second biggest customer, reported weak third quarter organic growth of 2.6%. That missed expectations for 3.9% growth.
Management blamed poorer weather in Europe, fierce competition and the impact of the hurricanes in Florida and Texas.
Unilever’s news is particularly significant given WPP largely attributed its disappointing guidance at the half year stage to cutbacks in advertising spend by consumer goods firms.
In our view WPP remains a long-term winner. It has a proven M&A strategy of avoiding large ‘transformational’ deals to focus on easier-to-swallow bite-sized acquisitions. This has helped position the company for a shift in advertising budgets to digital formats and has increased its exposure to faster growing emerging markets.
Next year should also be better for the company thanks to the football World Cup in Russia and the Winter Olympics in South Korea. Any guidance on these events when the company updates on third quarter trading on 31 October could be supportive to the share price.
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