WPP shares have haemorrhaged so much value that the group’s name could stand for “Worst Price Performer”. Shares in the advertising and media group have fallen by more than a fifth in the past month, most of that in the wake of last week’s abrupt profits warning.
Worse still, the shares are down by just over a third since the start of the year as worries about how it will carve out a new and viable future have taken root. That is equivalent to more than £5.5 billion in lost shareholder value and WPP, while likely to retain its coveted position in the FTSE 100 index, is valued at just over £11.25 billion, compared with more than £16.8 billion at the beginning of January. What’s going on?
WPP is one of the world’s four big advertising and marketing companies, going head-to-head to win client business against Publicis, Omnicom and IPG. It was founded by Sir Martin Sorrell in 1985, when the advertising entrepreneur took charge of a small company called Wire and Plastic Products and transformed it via audacious takeovers, including those of J Walter Thompson and the Ogilvy Group, and myriad smaller deals and minority investments. Sir Martin left in April after an investigation into his personal conduct. He has denied any wrongdoing. His replacement, Mark Read, is busy unpicking, or in some cases reworking, some of the charismatic former boss’s rampant empire-building.
Last week’s profits downgrade was a shocker. WPP reversed an upgrade in June, when it guided investors to expect an increase in underlying revenues of about 0.3 per cent this year, to a prediction of a drop of between 0.5 per cent and 1 per cent. At the same time, it warned investors that it would suffer a hit to its margin of more than the 0.4 per cent that it had stated in June. No surprise, then, that shareholders took it badly.
WPP has several problems. First, the behaviour of its clients is changing. Companies, including Procter & Gamble, are bringing their marketing work in-house and some are working directly with the likes of Google and Facebook to manage their brand image. WPP is more exposed that others in this regard as many of its clients are in the fast-moving consumer goods sector, where companies have been more willing to manage their own budgets.
WPP has lost some of the work it has been doing for key clients, including its lead role for Ford, the carmaker. It also has failed to win pitches, primarily for high-margin roles as a media buyer, for American Express, Glaxosmithkline and HSBC, among others, although it has won work for Adidas, T-Mobile, Mondelez and Hilton.
Last, it has problems of its own making: its vast array of disparate businesses haven’t been working together effectively and it has failed to respond rapidly enough to the rise of the digital age and the simplicity of contact its customers now expect.
Mr Read is fixing the problem, auctioning off unwanted minority stakes, raising £704 million in the process so far and with more to come. He also is simplifying WPP, for example by folding its previously separate activities in healthcare into its big agencies in the United States. He has decided, too, to sell a majority interest in Kantar, the market researcher that has been a drag on growth and will be as useful to the group outside it as within. All this is helping to reduce WPP’s net debt, down by £925 million in a year.
WPP shares, up 8¾p to 888½p yesterday, are ridiculously cheap, trading at a little above six times earnings and with a yield of a whopping 6.7 per cent. The problem is that they probably have further to fall. Ahead of an important strategy update next month, they’re too risky.
ADVICE Avoid
WHY The turnaround has just begun and the shares are likely to fall further before a recovery
Ferguson
What are Ferguson’s shareholders so worried about? Shares in the supplier of plumbing and heating equipment have slid by more than 19 per cent since the beginning of the month, when it published a set of full-year results that seemed to suggest there was plenty of fuel in the combi boiler.
The sharp sell-off puts Ferguson shares at their lowest level in just over a year and brought an abrupt end to a strong run in which the price had risen by just under 14 per cent since January.
Ferguson, founded as the Wolseley Sheep Shearing Machine Company in 1887, was known until last year as Wolseley. It moved into the American market in 1982 and now makes 90 per cent of its money in the United States. It is a member of the FTSE 100 and is valued at just over £12 billion.
Results for the year to the end of July indicated that the US division was in rude health, with revenues up 11.3 per cent to nearly $16.7 billion, the vast majority of it organic, and trading profit up 16.8 per cent to $1.4 billion.
Investors, however, concluded that the American construction market had reached a peak and was poised for a fall that would hit Ferguson, which makes about half of its revenues in the residential sector, hard.
The central role played by the US housing crisis in the global financial meltdown in 2008, which prompted a collapse in Ferguson’s share price from a similar peak to a low of barely above 600p, was still very much alive in the minds of some.
Yet the official figures don’t really back up such a view. Building work started on an annualised 1.2 million American homes in September, a fall of 5.3 per cent on the previous month but still comfortably above June and July and 3.7 per cent higher than the same month the previous year.
Even if the market is cooling, only 18 per cent of Ferguson’s US earnings come from supplying kit to new houses. The vast majority is from less volatile “repair, maintain and improve” homeowners.
Ferguson’s shares, up 123p at £52.83 at yesterday’s close, trade on 13 times earnings and offer a yield of 2.8 per cent. They feel oversold.
ADVICE Buy
WHY It is a high performer in US and worries are overdone
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