WPP is not in a good place. If pressed, even the world’s biggest advertising and marketing group probably would admit it.
The question for investors is whether, when it emerges from what is bound to be a painful reinvention, there is going to be a place for WPP in a world of brands and campaigns that is also fundamentally changing (in fairness, that question applies equally to the group’s peers, none of which you’d probably recreate in their present form if you started from scratch).
WPP is one of the world’s four big advertising and marketing groups, vying for business with Publicis, Omnicom and IPG. It was founded in 1986 by Sir Martin Sorrell when he became chief executive of Wire and Plastic Products, a basketmaker. Sir Martin embarked on a series of takeovers, including of J Walter Thompson in 1987 and the Ogilvy Group in 1989, followed by buying hundreds of small businesses around the world.
WPP manages advertising and marketing for some of the biggest companies, including Ford, Mars, HSBC, Unilever, Procter & Gamble, BP and IBM. It owns data and research businesses, including Kantar; it runs public relations and lobbying outfits through companies including Burson-Marsteller; and it manages digital services, with companies such as Blue State Digital.
But the world it works in is in flux. Some of its biggest clients, including Ford and reportedly Mars, HSBC and Royal Dutch Shell, have put their accounts under review. P&G is among those businesses that have decided to bring much of their marketing in-house to help to cut costs. WPP’s clients are able to work directly with the likes of Facebook and Google to manage their digital branding, while professional services firms are providing competition that the group did not have previously.
The marketing and advertising business is cyclical. When economic downturns come, the first thing to feel the effects of any cost-cutting is the marketing budget, with its obvious effect on the top line of a company such as WPP. Moreover, the group is having to contend with these moving parts without a chief executive, after Sir Martin left in April in the wake of an investigation into his personal conduct. He is providing even further competition, having set up S4 Capital weeks after leaving. Sir Martin emerged victorious this month from a bid battle with WPP to win control of Mediamonks, a Dutch digital advertising agency.
Mark Read and Andrew Scott, who are running WPP day-to-day, have started to simplify the group, offloading minority stakes, including in Appnexus, a marketplace for digital advertising, and Globant, a software company. Others will follow. They have resisted a break-up, but have acknowledged that WPP needs to get closer to its customers and to be more effective in the digital world. For probably the next year, there will be little or no growth. In its favour, debts are coming down and the dividend looks safe.
None of this is good enough for Berenberg, which reiterated its “sell” recommendation yesterday. It reckons that change at WPP will be disruptive and speculates that it could lose a string of accounts.
WPP’s shares, up 36p at £11.91, look cheap; they have fallen by 38 per cent since their peak in March 2017 to trade on a multiple of nine times earnings and with a yield of more than 5 per cent. There is too much uncertainty, though, and the shares could fall further. It is worth revisiting once there is firm evidence of a recovery and growth.
ADVICE Sell
WHY There is too much uncertainty while WPP is in recovery mode and adjusting to changes in the advertising industry
Sthree
Sthree is the smallest and the most specialist of the listed recruitment companies (Miles Costello writes). It also has the daftest name.
Sthree derives from “the three Ss” of solutions, staffing and software. It was founded in London in 1986 and specialises in placing staff in the science, technology, engineering and mathematics sectors.
It reported a strong set of first-half results yesterday that showed a 6 per cent increase in pre-tax profits to £20.3 million over the six months to the end of May, on revenues up 12 per cent at £585.9 million. The half-year dividend was held at 4.7p and that pushed the shares 4p higher to 351½p.
Regionally, there was improving growth in the United States, where it makes a fifth of its profits, and in continental Europe, which accounts for more than half of its business. Gross profits in the UK and Ireland, which make up 18 per cent of profits, fell against the same period last year as uncertainty around Brexit meant that fewer people moved jobs. Asia Pacific and the Middle East continued to grow, but the rate slowed during the second quarter as its Australian unit struggled in an extremely competitive market.
Recruitment is quite closely tied with the economy, so Sthree and its peers — Robert Walters, Hays and Page Group — tend to do well when times are good and the jobs market is on the up. Sthree seems to be quite well placed here, as it counts the expanding IT business and the recovering energy market as among its areas of expertise.
There is plenty to recommend Sthree, including substantial growth opportunities in the US, a diverse European business, led by Germany, and its successful prioritisation of securing contract work for its customers, which suits its specialisms and is less sensitive to geopolitics. If you’re happy to invest in the recruitment sector, which is no given because it is so inherently cyclical, Sthree looks like your most attractive bet. It trades on a multiple of earnings of a little below 17 times, a discount to its rivals, but, at just over 4 per cent, it also offers the richest yield by some way. The shares move around a fair amount, so buy on weakness.
ADVICE Buy
WHY It offers the best value if you are tempted by the sector
