Over the past two years, WPP has earned itself the undesirable reputation of being one of the FTSE 100’s worst performing investments.
Since the beginning of September 2016, the stock has fallen by 26% excluding dividends. In comparison, over the same period, the FTSE 100 has added 12%. WPP has underperformed the broader index by a staggering 38%. After these declines, the stock is trading at a relatively attractive 10.7 times forward earnings. But is this a price worth paying for the struggling conglomerate?
A world leader
As the world’s largest advertising a media agency, WPP should command a premium over the rest of the market. For 2017, the company generated £15.3bn in revenue, significantly more than peer Publicis’ $10.4bn or Interpublic’s $8bn. WPP’s size and scale gives it a tremendous advantage in a market where access to the best sources for clients to advertise products is highly prized.
However, WPP is struggling due to factors both within and outside its own control.
For a start, earlier this year the group’s founder and CEO Sir Martin Sorrell left the company on relatively bad terms. Since then, rumours surrounding his departure have weighed on the business and its reputation. Investors have also expressed concerns that the firm might not be able to function without its visionary CEO overseeing the mishmash of acquisitions he has presided over during his tenure.
Sorrell’s departure came at just the wrong time for the group. The advertising industry is currently in upheaval as Facebook and Google decimate existing relationships and redefine the global advertising market.
WPP isn’t the only companies suffering from these external headwinds, but the group’s internal issues are only exacerbating the problems.
The big question is, what is next for the group? Over the past few years, several of the company’s largest clients have announced they are reviewing relationships with the firm including Ford, HSBC, Mars and Marriott. If these big spenders start to leave WPP could be in trouble. Its 30 largest clients are responsible for around 30% of overall revenue.
Still, the company does have a number of advantages over online competitors and its peers.
Sorrell’s desire to turn the business into a one-stop shop for marketing is something few other competitors can offer. Clients are more likely to continue to pay for integrated services rather than spend the extra time and effort trying to save money by breaking up their contracts.
Put simply, WPP’s size is the company’s primary advantage, and this will help it stage recovery.
Does as of the above mean it’s time to buy the shares? I’m cautiously optimistic about the group’s outlook. Shares in the company are currently cheaper than they have been at any other point in the past five years. There’s a lot of bad news already baked into the stock. Any upturn in performance could see a sudden change in sentiment. At the same time, there’s a 4.7% dividend yield on offer for investors willing to wait.