Tuesday, 26 August 2014

WPP says...the best slides from the 118 page presentation deck of the global number 1 advertising company

Back in June (link here) in my last major advertising sector update I talked about top-slicing some Interpublic at US$20 and waiting for some weakness below 1200p in WPP from a relative value perspective.  The spread between the two has widened a touch since then and both shares have traded respectively above and below these interesting levels i.e. the summer has been an opportunistic time to be getting involved in the space.  

Over the last couple of months, I undertook a big top-slice in Interpublic...but did not buy any WPP below 1200p (too many other 'bargains' in early August!) which looks a shame today with the share nearer 1250p.   Nevertheless the  118 page WPP presentation contains plenty of insights.  Here are a few of my favourites.  
The only 'miss' on their targets was due to the heavy negative FX influence reporting back in sterling...

...the other clear stand-out on the headline numbers was the relatively weak performance of Western Europe:

No surprises there given that advertising and GDP are somewhat related:

Of course there are parts of the advertising market that remain strong.  Unsurprisingly digital advertising is the main growth driver in all markets...

...led by the internet and especially mobile of course.  WPP remains the global leader in digital advertising and thematically this, along with their generally high global market positions, is the strongest micro underpinning for their shares.

However this has not translated into a premium valuation at least as measured on a market cap/ebitda basis.  Interpublic's earlier noted good performance (and hence higher current valuation) can be seen here too.  This chart also makes me want to dust down Omnicom again, a few months after their deal break-up with Publicis (let alone appraising the scope for GfK and Ipsos including - I guess - potential consolidation).

Back to WPP however.  The company's continued shareholder friendly focus continues and despite using a third plus of the company's current free cash flow on new acquisitions, on-going buybacks should boost total returns to shareholders to the near 6% range.  Not bad at all.  

Prospective valuation remains firm at x12s EV/ebit but sub 1200p the company remains of interest given high exposure relative to peers to the digital and emerging market growth themes.  Global GDP hopes moving around inevitably will impact the shares.  From a value perspective I would initially buy sub 1200p and then augment each new pound down, picking up the shareholder remuneration in the interim.

I will revert later in the week on some of the other names above.

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