When markets are this unstable, you really don’t want companies in your portfolio to be releasing bad news. It’s therefore completely understandable if some holders of advertising giant WPP (LSE: WPP) were hiding behind their sofas this morning as it revealed an update on recent trading.
Based on the market’s early reaction, its seems this fear was justified.
“Slow to adapt”
To say the numbers weren’t inspiring is putting it mildly. Reported revenue fell 0.8% to £3.76bn in the three months to 30 September. When currency fluctuations are taken into account, growth came in at 1.2% with like-for-like revenue flat. Much of this was blamed on previously-highlighted issues including poor performance in North America (where sales have fallen almost 6% this year).
This brings reported revenue for the first nine months of 2018 to a little below £11.25bn — down 1.6% on that achieved at the same time in 2017. At constant currency, revenue was up 2.3%, with like-for-like revenue up 1.1%.
New CEO Mark Read — brought in last month to replace founder Martin Sorrell who left after many decades at the firm — was clearly keen to make a bold start to his tenure, stating that a reversal in WPP’s fortunes “requires decisive action and radical thinking“. He reflected that the company had been “too slow to adapt” to an industry “facing structural change, not structural decline“. In tune with many city commentators and shareholders, Mr Read also said that WPP had become too complex and had under-invested in core parts of its business over the years.
Having fallen 45% in value since March 2017, the question is whether the stock is now so hated to actually be considered a decent contrarian investment?
Worth catching?
It’s clearly going to take some time to turn the beast that is WPP around. In a subdued market, some investors would be understanding. The recent return of volatility, however, means that patience is in even shorter supply than usual. The fact that owners will now need to wait until December for a further update on strategy is asking a lot given that much can happen in economic and political terms in a couple of months. In a sense, today’s double-digit fall isn’t all that surprising.
Nevertheless, there are indications that WPP’s new management is doing what it can to speed a recovery.
Net debt fell by £925m in the quarter, partly as a result of making 16 disposals (raising £704m) in its aim to become a more streamlined business. Digital agency VML and advertising agency Y&R have been merged since Mr Read’s arrival and a number of key appointments have been made. Today, the FTSE 100 firm also declared its intention to offload its stake in data group Kantar.
Before this morning, the shares were trading on a valuation of just 9 times forecast earnings (although analysts are now likely to revise previous estimates). Yielding 6.7%, it could be said investors are being sufficiently compensated for their patience, even if the security of these payouts could come under scrutiny if the business continues to struggle.
With markets becoming increasingly nervous, it’s a brave investor who considers building a stake in any struggling company at the current time, especially as there are less risky options in the top tier right now so I’ll let that falling knife drop.
WPP will likely survive but its new leader has his work cut out.
