We recently maintain our Neutral recommendation on Dublin, Ireland-based advertising titan, WPP Group Plc. (WPPGY).
The company over time has been acquiring or investing in businesses across the world; all aimed at expanding the company’s operations in fast growing emerging markets and enabling access to vast untapped markets in those regions.
In 2011, WPPGY made a number of acquisitions with roughly 24 in new markets, 32 in new media and 8 in consumer insight. In the first quarter 2012, roughly 10 acquisitions in new markets, 2 in consumer insight and 2 in other areas were carried out. These strategic acquisitions represent a major competitive advantage for the company and enhance its creative reputation and co-operation among the Group companies.
First quarter 2012 was good for the company; a trading update for the quarter revealed roughly a 7.6% revenue growth on the back of strength across all geographical regions and communication services sector. On a constant currency basis, revenue grew by 7.4%.
For the full fiscal year 2012, management expects revenue growth, excluding the impact of acquisitions and currency fluctuations, to be over 4%. Operating margins are expected to improve by 50 basis points. Over the longer term, management expects above-industry average revenue growth, 0.3 points or more annual improvement in staff cost/revenue ratio and 0.5 margin points or more improvement in operating margin. PBIT is expected to improve by 10%-15% p.a. on the back of margin growth and benefits from small and medium-sized acquisitions.
However, a competitive and fragmented advertising/communication industry with risks of losing market share and foreign exchange fluctuations ever lurking in the scenario is a matter of constant worry for the company. This advertising and communications services provider competes with other industry players including Interpublic Group of Companies Inc. (IPG), Omnicom Group Inc. (OMC) and Publicis Groupe SA (PUBGY.PK).
Also, the company’s international operations expose it to the risks of local legislation and unstable political conditions. Furthermore, excessive dependence on a few large clients also makes the company more vulnerable to loss of business.
The current Zacks Consensus EPS Estimates for WPP plc are $5.67 and $6.32 for the fiscal years 2012 and 2013, respectively. The estimates represent a year-over-year growth of 5.39% for 2012 and 11.54% for 2013.
The stock also bears a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating.
INTERPUBLIC GRP (IPG): Free Stock Analysis Report
OMNICOM GRP (OMC): Free Stock Analysis Report
WPP PLC (WPPGY): Free Stock Analysis Report
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