Baker Street, London -- Despite it being a traditionally quiet period while everyone is lying on the beach, world equity markets are enjoying buoyant conditions. Asia started the week where the Americas left off with gains of several per cent, and it was only the fact that a number of UK companies went ex-dividend that pushed the UK market into negative territory. So if you are a shareholder in British Telecom (LSE: BT.A), BP Amoco (LSE: BPA), GKN (LSE: GKN) or TI Group(LSE: TI) you can look forward to a cheque in the post when you came back from your holiday. Nevertheless, this week has been declared national boredom week (unless you are expecting A-Level results) so we won't add to it by giving you trivia, just the news that matters.
Rentokil Initial(LSE: RTO) was the best performer in the FTSE 100 this morning with a gain of 8p to 254.25p. The company reports interim results on Wednesday and it would seem the market got too pessimistic when it pushed the stock down to a low of 223p last week. That price level has not been seen since October 1997. Interestingly the prospective P/E then was 20, and now it is 18.
Another stock of great interest to Fools is Torotrak(LSE: TRK). This designer of innovative gearboxes gained 20p to 185.5p after a positive statement from the Chairman at the company's first AGM. He said the first target will be the Sports Utility Vehicle (SUV) market and trials will begin in September.
WPP Group (LSE: WPP), the advertising group, rose 5.5p to 594.5p after announcing first half profits. Bruce describes the results in detail in today's Lunchbox.
Wounded wonder stock Jarvis(LSE: JRVS) regained some of its poise today with a spirited rise of 24p to 325p. The gain came after the company announced it had resolved its dispute with Railtrack(LSE: RTK), down 13p to 1203p, over charges for maintenance work.
Moving down today was Helphire (LSE: HHR) with a fall of 22p to 227.5p, making it the worst performer in the FTSE All Share. Apparently the stock is the subject of a bear squeeze from a noted raider.
Enic(LSE: ENI), the investment trust specialising in football clubs, had a bad morning loosing 10p to 125p. The slide was linked to the company's purchase of a 25.1% stake in Victor Chandler (International) On-Line, the on-line bookmaker. Normally, companies going into the Internet get re-rated upwards; this move shows that is not always the case. The football sector was lit up by rumours of more deals. BSkyB(LSE: BSY), down 9.5p to 577.5p, is said to be in talks to buy a 9.9% stake in Chelsea Village(LSE: CAV), up 7p to 88.5p, and a 9.9% stake in Leeds Sporting, owner of Leeds United(LSE: LES), up 2p to 25.5p.
Storehouse(LSE: SHS) continued its decline with a fall of 6p to 112p as bid speculation faded away, yet again.
Some of the gloss has come off the mining sector, despite furious bid activity among the aluminium stocks in Europe and America. Billiton(LSE: BLT) dropped back 13p to 278.5p and Rio Tinto(LSE: RIO) were marked down 13p to 1251.5p.
Baker Street, London -- One would be forgiven for thinking that Martin Sorrell was your typical City Fat Cat. Yesterday's Sunday Times business section led with the headline "WPP rewards Sorrell with £35m bonus" -- not bad going, I think you'll agree. There is often more interest about his pay package than about the company he has built up from virtual bankruptcy over the past 13 years, and which now resides in the FTSE 100 index of leading shares with a market capitalisation of £4.6 billion.
Sorrell's bonus has been linked to the outstanding returns long-term shareholders have made in WPP Group(LSE: WPP). Over the past 5 years, the period to which the oversized share-option-based bonus refers, the share price has risen from 110p to lunchtime today's 595p, a compounded annual growth rate gain of 40%! Despite the press murmurings, I'm sure shareholder's won't begrudge Sorrell his dues.
WPP is a global marketing services company, owning agencies such as Ogilvy & Mather and J Walter Thompson, amongst many others. Its core services include advertising, media planning, information and consultancy, public relations, branding and identity and specialist (Internet) communications. Today it reported interim results for the six months to June. The highlights were;
-- Sales +13% to £1.017 billion
-- Pre-tax profit +20% to £112.6 million
-- Operating margin 12.7%, up from 12.1%
-- Earnings per share (EPS) +17% to 9.8p
-- Interim dividend +19% to 1.0p
These are stellar numbers from a well-managed company. In a two page outlook statement, rare in both its length and candidness for any company, let alone one reporting at the interim stage, WPP said it expects the second half to largely track the first in terms of underlying growth. As for 2000, with the US Presidential Election, the Sydney Olympics and the Millennium, WPP is looking at advertising growth in excess of 1999's underlying rate of 5-6%. Before you start thinking that this implies 2000 growth for WPP of say 7-8%, the company is taking market share and increasing profitability, so double digit earnings growth at the very minimum is looking on the cards.
One of the things that first attracted me to WPP was their reporting openness and frankness. Such statements as "The Board continues to examine ways of deploying its substantial cashflow of over £200 million per annum to enhance shareholder value…" are music to this Fool's ears. This is a company that knows who their number 1 priority is -- the owners, more commonly referred to as the shareholders.
New media (i.e. the Internet) offers great opportunities for companies such as WPP, and they are not intending missing this particular boat. They have formed a new media parent company, called wpp.com, which if it were a separate company, would have 1999 estimated revenues of US$100 million. Hmm… let's work out a Freeserve (LSE: FRE) type valuation on this one. Slapping a price to sales ratio (PSR) of say 400 on those sales gives a market capitalisation of US$40 billion -- more than even Yahoo's (NASDAQ: YHOO) US$30 billion. Does that mean WPP Group is a screaming bargain, because the whole company is capitalised at just £4.6 billion, or that Freeserve is ridiculously overvalued? I'll leave you to work that one out.
Warren Buffett is a fan of marketing companies and advertising agencies. They are people businesses, as it is the creative people who come up with the zany, wacky but effective ideas you see plastered on billboards and splashed across your television screens. Give these people an office to work in, a computer, a couple of pens and pencils, a telephone and large expense account, and you've got yourself a business. The attractions therefore to people like Buffett come because of the low capital expenditure nature of the business, and therefore the high free cashflow the good companies can generate.
On the downside, advertising agencies are often the first to be hit during an economic downturn. Marketing is a purely discretionary expense, and therefore client companies cut back on that part of their expenditure when times get a little tough. That's one of the reasons why WPP's share price was marked all the way back to about 200p in October last year, as the market feared we were entering a global recession. Those brave enough to tread where others feared would today be rewarded with an amazing 200% increase in less than a year. Who needs Internet and telecommunications stocks?
Whilst the company's valuation, to the naked eye, looks to be up with current events, Fools may want to keep an eye on this excellent company. Should another irrational October 1998 sell-off occur, an excellent buying opportunity may one day be staring you in the face.
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