Media group WPP (LSE: WPP) seems to be one of the most disliked stocks in the FTSE 100. Back at the beginning of 2017, shares in the group were changing hands for nearly 1,900p. However, today they’re dealing for under 1,000p.
The company’s falling earnings can explain some of this decline. The group reported net income of £1.8bn for 2017 or 126p per share. But following the loss of a few key contracts and rising costs, net income fell to £1.1bn for 2018 and earnings are expected to fall further this year.
City analysts are expecting WPP to report earnings of 98p per share for 2019. Based on these projections, the stock is currently trading at a forward P/E of 10.2.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Undervalued
I believe this valuation undervalues the business. It seems to me at the market is not giving any credit to the recent progress WPP has made with regards to sales growth.
At the end of October, the business reported its first quarter-on-quarter increase in sales for more than a year. The advertising group reported 0.7% organic sales growth in the third quarter.
Analysts had been expecting a 0.6% decline in organic growth. For the full year, management is projecting a 1.5% to 2% decline in revenues on a like-for-like basis. Nevertheless, the fact that WPP’s third-quarter sales improved shows that green shoots are appearing.
Changing face
WPP was caught off guard by the changing face of the media industry.
Clients use to rely on firms such as this to take care of all their marketing needs, but now some clients have moved the process in-house, while consultancies and tech groups have grabbed large market shares.
The challenge for WPP’s management now is to rebuild the group for the 21st century. It is making progress on this front. Non-core asset sales have helped to reduce debt and streamline the business, and the next step is to enhance the company’s technology offering, through acquisitions and organic investment.
The uptick in organic growth in the third quarter seems to suggest that these efforts are winning over customers.
A buy for 2020
As WPP continues to refocus its offering, I think there is a good chance we could see the company return to growth next year, and if it does, I reckon the market will take a different view of the business.
Indeed, a return to growth will justify a much higher multiple for the shares. Historically the stock has changed hands for a mid-teens P/E, a return to this level could push the stock up by around 50%, according to my calculations.
And in the meantime, while investors wait for a recovery, WPP offers a 6% dividend yield. The payout is covered 1.6 times by earnings per share, so even if profits do fall further, it looks as if the company has plenty of headroom to both maintain the distribution and reinvest in the business.
