WPP Group revenue growth may face headwinds

<p>WPP Group said its first-half results were comfortably above expectations, even as it blamed relative strength in sterling for denting sales and added its voice […]</p>

WPP Group said its first-half results were comfortably above expectations, even as it blamed relative strength in sterling for denting sales and added its voice to general misgivings about risks to economic growth from Western sanctions against Russia.

The group also highlighted benefits it continued to reap from the recent failure of two of its rivals to merge, although a major question WPP Group will be increasingly faced with toward the end of the year is ‘how does it intend to continue to grow at a pace that is fast enough to satisfy investors’?

The world’s largest advertising agency posted a 30% rise in net profit to £364.8m while revenue rose to £5.47bn from £5.33bn, with acquisitions and growth in UK helped offset losses caused by the relative strength of the pound against the dollar and some emerging market currencies.

WPP kept full-year targets. The group has been aiming for its operating margin to improve 0.3 percentage points this year, excluding currency shifts.


Sir Martin Sorrell says Ukraine could work out to be an advantage

Comments by WPP’s influential founder and CEO, Sir Martin Sorrell, today (Tuesday 26th August) have caught the attention of the news media just as much as the group’s earnings.

He said the situation in Ukraine and the impact of Western sanctions on Russia had replaced the health of the euro zone as the major geopolitical worry.

“Anxiety is heightened so it will make clients more cautious” he said in an interview today. “It’s very difficult to see a way through these current problems between Russia and the rest of the world over Ukraine.”

WPP revenue rose between 10% and 20% on a like-for-like basis but Sorrell said he expects the range to be lower in the second half as the effect of sanctions on Russia begins to bite. WPP makes about 3% of its sales in Russia.

Even so, Sorrell suggested the increased uncertainty stoked by Ukraine could actually work out to be an advantage for the advertising and marketing industry. “M&A activity is not quite so strong and people will use the money on their balance sheets…to invest in brand” according to Sorrell.

Brighter regional spots include China, where growth reportedly was reaccelerating; WPP’s like-for-like growth in emerging markets was twice as strong in the second quarter as in the previous quarter.

A factor providing an observable boost during the first half was the failed merger between WPP Group’s giant advertising peers Publicis Groupe SA and Omnicom Group Inc. Sorrell said the group picked up clients and staff from the two companies whilst the pair was attempting to merge.

WPP continues to add digital revenue streams

In keeping with the manner in which WPP Group grew to such massive size, it reported it had continued with an acquisitive streak of recent years, by adding more digital advertising firms especially in faster growing regions such as Asia-Pacific. The GroupM media buying subsidiary bought digital search marketing agency Keyade in France, whilst Millward Brown grabbed media analytics company InsightExpress.

Digital revenues are set to reach 40-45% of WPP Group sales, according to the group.

Overall though, cash generated by the WPP Group’s operations was £207.4m in the first six months a little more than half the amount at the same period in the year before.

The relative strength of the pound which peaked around $1.70 last month has taken its toll on revenues whilst WPP Group suggested clients largely remained in cost-cutting rather than revenue-increasing mode.

The shares have traded as strongly as 3.4% higher than Friday’s close, despite the qualifications the firm has stressed in its group results.

Market likes WPP’s low-risk profile and strong CEO

The market seems to regard the group as representing little risk with its prospective dividend yield for the next twelve months a reasonable 3.3% against 2.4% on average for closely comparable peers. The market also seems content to look on the bright side with regards to the concentration of authority vested in WPP Group’s charismatic CEO, who has had the position for almost 30 years, having built the company virtually from scratch from his own vision.

There’s little doubt ‘star culture’ of one person’s leadership can be a risk, although it may be a moderately remote one for WPP Group.

More importantly, even as WPP continues to purchase digital businesses (54 in 2013, the most amongst its largest peers) there is a limit to the amount of growth possible from such small-to-medium-sized acquisitions.

Only large takeovers would be likely to make an exponential impact on revenues. Such large buys would of course risk significant share price impact as well as regulatory scrutiny.

Considerations like revenue growth and currencies will remain key headwinds for WPP in the second half and the stock will face a test of its strength at least partly on these basis, as it once again approaches a recent top around 1283.85p. Trade above the latter could provide room to as high as 1316p, although if caution sets in within the medium term (something I expect to occur) the stock will potentially return to lows seen earlier this month around 1162p.

More pessimistically, the stock in January clearly broke a near two-year uptrend and needs to trade above 1275p sustainably in the near term to demonstrate its slide was only temporary.

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