Investors seem to go through periods of communal pessimism, when downbeat sentiment punishes even companies that are doing well. I’m seeing increasing signs that such a mood is upon us now — and I love it.
I’m reminded of two of Warren Buffett’s maxims, “Be greedy when others are fearful” and “It’s better to buy a wonderful company at a fair price.” Times of maximum pessimism make both of these much easier to follow.
I’ve been impressed by advertising and PR group WPP (LSE: WPP) for a number of years, and I was surprised by the market’s reaction to its 2017 full-year results on Thursday.
The firm reported a 5.4% rise in headline pre-tax profit to £2,093m, with a 6.4% boost in headline diluted EPS to 120.4p — up 1.9% and 2.7% respectively at constant currency. These headline figures appear conservative, as reported figures are higher.
The dividend was raised by 6% to 60p, in line with the company’s targeted 50% payout ratio.
Not pretty?
Something I like about WPP is its reluctance to sugar-coat anything, and that was highlighted by CEO Sir Martin Sorrell when he said: “2017 for us was not a pretty year, with flat like-for-like, top-line growth, and operating margins and operating profits also flat, or up marginally.“
But to put that into perspective, we’re in a very tough market right now, and with discretionary spending pared right back, pressure on the marketing world is high. To record a flat year at such times is, in my view, a mark of a well-managed company.
The share price fell 15% in the morning, coming back in the afternoon to a 12% drop at around 1,240p. And I reckon that’s a buying opportunity.
Sure, there’s a 23% fall in EPS suggested for 2018, but that would still leave us with a forward P/E of 11. And dividends look set to yield better than 4.5%, well covered by earnings.
WPP looks like a very good company, at a very fair price.
Another bargain
I actually see quite a few FTSE 100 bargains at the moment, and I count ITV (LSE: ITV) among them. That’s a feeling I share with Neil Woodford, who holds ITV shares in his Income Focus fund.
ITV has been recording some pretty decent results, with rising earnings and a progressive dividend — the payout has climbed from 3.5p in 2013 to 7.8p last year, and is forecast to keep growing to yield above 5.5%.
But the market has not been rewarding the shares accordingly, and they’ve lost around a third of their value in the past two years.
Some of that will be down to a predicted flattening of growth, with EPS expected to be largely unchanged between 2015 and 2019. But that would drop the P/E as low as 10.5, with the dividend still covered nearly 1.7 times and probably safe.
Again, I suspect that pessimism around the advertising business is also a factor, but the down spell is surely part of the natural cycle and merely a follower of general economic trends. And if you expect the economy to do well in the long run, as I do, surely you’ll expect advertising to benefit along with it?
ITV is much more than just a taker of TV advert cash these days anyway, with around 50% of its revenue now coming from other sources — and rising.
I see another oversold bargain here.
