We recently downgraded our recommendation on WPP Group plc (WPPGY) from Outperform to Neutral.
The downgraded rating is backed by highly competitive and fragmented communications services industry, wherein risk of clients shifting their accountability to other agencies may result in loss of market share, thereby decreasing profit. Given the service-oriented competitive nature of the advertising and communication industry, attracting new clients and retaining the existing client relationship pose a challenge for the company.
Moreover, the group’s dependence on a limited number of large clients for a significant portion of its revenues may prove detrimental to its performance, as a loss of any of these big clients could adversely impact the company’s prospects, business, financial condition and results of operations.
Amid such challenges, WPP has been maintaining its position as one of the largest advertising companies in the world and a significant player in the US with dominant market share and pricing power in the advertisement industry.
The company recorded an encouraging rise in revenue and margins during the first half of 2011 and expects revenue growth, excluding the impact of acquisitions and currency fluctuations, to be over 6% along with a margin improvement target of 0.5%.
The company’s continuous strategic acquisitions and cost reduction initiatives on the backdrop of improved demand and increased spending power of the consumers appear encouraging in the medium and longer term.
Moreover, the company’s investments and mergers made in digital tools and infrastructure will also facilitate WPP to create value for its clients. The company has shown commitment to its shareholders and has recently declared its interim dividend of GBP0.0746, representing an increase of 25% from its previous dividend rate of GBP0.0597.
However, we are concerned about the company’s significant international operation, which exposes it to the risk of change in foreign exchange rates, complexity and delay in local legislation and unstable political conditions.
Based in Dublin, Ireland, WPP Group plc provides advertising and communications services worldwide. The company faces competition from its peers like Interpublic Group of Companies Inc. (IPG), Omnicom Group Inc. (OMC), and Publicis Groupe SA.
INTERPUBLIC GRP (IPG): Free Stock Analysis Report
OMNICOM GRP (OMC): Free Stock Analysis Report
WPP GRP PLC (WPPGY): Free Stock Analysis Report
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