Shares in the world’s biggest advertising agency and FTSE 100 constituent WPP (LSE: WPP) fell this morning as investors reacted to the departure of CEO and founder Sir Martin Sorrell over the weekend.
After 33 years at the helm, Sir Martin stepped down in response to a now-completed investigation into an allegation of misconduct, specifically the use of what WPP has now labeled “immaterial” amounts of company money. The £15bn-cap has confirmed that he will be treated as having retired and that chairman Roberto Quarta will take over while a search for a new CEO is conducted.
In a statement, Sir Martin remarked that he was “sad to leave” but that it was in the best interests of the business for him to do so.
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Annus horribilis
Sorrell’s untimely departure is the latest setback to hit WPP. The company has struggled in recent times as a result of a cutback in marketing spend by consumer goods companies and brands migrating towards tech titans Facebook and Google. Indeed, in its most recent set of full-year results, the now-departed CEO reflected that 2017 had not been “a pretty year” for the business.
The challenging trading environment hasn’t gone unnoticed by investors. Taking into account today’s additional drop, just over 40% of WPP’s value has been wiped in a little over a year. Contrast that with the mere 1% fall seen in the FTSE 100 and we have yet another illustration of how volatile shares in individual companies can sometimes be and the importance of building a suitably diversified portfolio.
Reasons to be cheerful
So, will WPP ever recover? Clearly, the loss of Sir Martin is a seismic event. Having built the company from scratch (becoming one of the longest-serving FTSE 100 CEOs in the process), Sorrell was a much-respected figure, even if his record-breaking pay packets angered many shareholders.
Nevertheless, there may be cause for optimism. At 73 years of age, Sorrell’s departure was at least somewhere on the horizon, even if the manner in which he left the company was unexpected.
Although investors hate uncertainty in general, this development has at least brought forward the inevitable search for a replacement. In a sense, this should give holders some comfort. It would also be a mistake to presume that a market-leading company is incapable of thriving following the departure or loss of an inspirational leader — Apple being one such example.
While Sir Martin’s replacement will have some difficult decisions to make, the company’s relatively new strategy of simplifying its operations looks prudent. So long as it’s able to transform from “a group of individual companies to a cohesive global team” — as intended by Sir Martin — the long-term picture for WPP surely isn’t all that bad. This is assuming, of course, that its board and investors decide against breaking up the company.
And the stock? Based on current forecasts, WPP’s shares change hands on a forward price-to-earnings (P/E) ratio of 10 and come with a seemingly well-covered 5% yield. That should be enough to at least interest both value and income hunters, even if many might wait until after Q1 numbers are released at the end of this month before taking a position.
So long as it truly can adapt to a changing market, I think WPP could be a great buy at these levels.
