The share price of FTSE 100 advertising group WPP (LSE: WPP) has fallen by more than 40% since peaking at over 1,900p in March 2017.
The stock edged lower again today after the company confirmed press reports that founder and chief executive Sir Martin Sorrell has been accused of misusing company funds and is under investigation.
Sir Martin rejects the allegations, which are being investigated by an independent law firm.
Since founding WPP more than 30 years ago, he’s turned it into a FTSE 100 firm that’s one of the largest of its kind. But global advertising spending is under pressure as big companies cut costs.
I believe WPP’s sliding share price is a reflection of a weaker outlook for profit growth, and of uncertainty over the future management of the firm. Even if today’s allegations are unfounded, I expect this incident to increase the pressure on the firm to plan for Sir Martin’s retirement.
Cheap enough to buy?
Despite weaker market conditions, this media giant remains a formidable business. WPP is expected to generate an after-tax profit of £1,487m in 2018 on sales of £13,018m. This implies a net profit margin of 11%, which is pretty good.
The only problem is that these figures are around 20% lower than in 2017, when WPP reported sales of £15,265m and a net profit of £1,912m. The group’s net profit margin last year was 12.5%.
Analysts’ consensus forecasts suggest that 2018 could be the low point for profits, which are expected to rise by about 5% in 2019. If this view turns out to be correct, then the stock could be worth considering at current levels. Trading on a forecast P/E of 9.5 with an expected yield of 5.4%, this could be a value buy.
My main concern is that the outlook could continue to weaken. I think it makes sense to stay on the sidelines for a little longer.
Are further gains likely?
The advertising market is uncertain, but a strong global economy means that some types of marketing business are performing well. One example is trade exhibition and event organiser ITE Group (LSE: ITE), which operates extensively in Russia and Asia.
This £425m firm says that results for the six months to 31 March are expected to be in line with expectations. Revenue for the half year is expected to have risen by 7% to £75m, but revenue growth from major events appears to be stronger.
Four of the group’s top 10 events took place during the first half. ITE says that these delivered “double-digit” like-for-like revenue growth. This momentum is expected to continue through the rest of the year.
The company said today that it has already booked 85% of forecast revenue for the current year. On a like-for-like event basis, this represents revenue growth of 14%. However, as not all events are repeated every year, overall revenue growth is expected to be lower, at about 5%.
My view
ITE’s decision to focus on its biggest events seems to be working well. However, the shares currently trade on 18 times 2018 forecast earnings, with a prospective yield of 2.6%.
Earnings are expected to rise by about 15% next year, but the shares still look fully-priced to me. I’m not tempted to buy at these levels, although I would continue to hold the stock while performance remains good.
