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Why WPP has become fairly valued

With a plethora of challenges threatening the marketing giant, organic growth is beginning to slow at WPP
June 15, 2017

Sir Martin Sorrell knows what it takes to lead a global advertising company through significant market changes. His tenure at the helm of industry titan WPP (WPP) has just entered its fourth decade - a period that has seen the launch of the internet, the digital television and the smartphone. If anyone can steer WPP through its current challenges it is surely Sir Martin.

IC TIP: Hold at 1703p

However, investors don't seem to be feeling confident. In the year to date, the shares are down 9 per cent and now trade on just 14 times forward earnings. To a certain extent that may be a reflection of the fact that many institutional holders are worried about the 72-year-old's longevity at the company. Statements from shareholders Royal London Asset Management and Standard Life following last week's annual general meeting focused on the importance of finding his successor. But as Mr Sorrell is showing no signs of letting up, that downturn in share price is also likely to be a result of the group's slow growth during the past six months and turbulent market conditions.

Yet many analysts think WPP is too cheap, with 18 of the 27 companies covering the group rating the shares a buy. Indeed, WPP is trading below its historical average. But with the advertising market accelerating towards major challenges - or what Sir Martin calls "simultaneous discombobulating factors" - it may be that this less generous rating is a better reflection of the WPP of the future.

Leading the slew of challenges is slow global GDP growth, to which corporate marketing spend is closely linked. With WPP's customers facing stunted top-line growth, demand for advertising services has fallen behind that of cost-cutting solutions. Meanwhile, with big corporations attempting to lower the number of agencies used for marketing, competition among the largest media companies has picked up. WPP's loss of its major AT&T contract last year is hurting trading in 2017. During the first four months of the year like-for-like revenue rose just 0.7 per cent. This is compared with a 4.3 per cent increase for the same period in 2016.

These challenges have been compounded by the meteoric rise of digital marketing, which has detracted from the allure of traditional print or television advertising. Admittedly, WPP has been re-aligning its portfolio to better reflect these demands. It has extracted costs from older companies and taken advantage of low interest rates to bulk up its debt facility in order to make digital acquisitions. In 2016 just shy of 40 per cent of total group revenue came from digital. However, if further growth in the digital world is reliant on cheap debt, there are new risks to WPP's long-term growth strategy when rates eventually do rise.

There is an argument that the ease of use of platforms such as Facebook or Google for marketing reduces the necessity for agencies. However, Duncan Painter, chief executive of Ascential (ASCL), which runs the world's biggest marketing event, thinks that the specialist skills required to advertise effectively online mean that companies will be turning increasingly to agencies rather than using in-house marketing teams.

However, digitisation is not only causing changes to company marketing choices, but also to the way the market works. Historically, media executives would buy advertising space from media owners and played a key role in choosing the most effective publications, websites and TV shows to reach the desired audiences for brand messages. Today that role can be automated. The efficiency of software is becoming an increasingly important factor.

In a seminar recently hosted by The Guardian, industry experts concluded that in the coming years media agencies would have to boost their digital skills and probably get used to lower margins, while maintaining their status as a value-added investment. Sir Martin thinks that without the latter "our industry may be in danger of losing the plot".