Advertising and PR giant WPP (LSE:WPP) has struggled in one way or another since March 2017. The world’s political uncertainties and Brexit were initially blamed for its surprisingly cautious outlook, which caused the share price to begin its descent.
After several record years of growth for the company, WPP reached the pinnacle of its success in February 2017 at over £18 per share, but then began a downward spiral. This included assignment losses among automotive, pharmaceutical, and fast-moving consumer goods clients in 2018, and several profit warnings.
Sir Martin Sorrell
Then followed drama and scandal for the firm when its former chief executive, Sir Martin Sorrell, left under a cloud of personal misconduct allegations, which he denied. Prior to his departure, Sorrell had been the longest-serving chief executive of a FTSE 100 company.
To add insult to injury, Sorrell went on to found rival company S4 Capital.
Company turnaround plan
Now part-way through a three-year turnaround plan that has begun to show growth in the UK, WPP seems to me to be on the right track to a more profitable future.
Following the company’s interim results in August, the share price lifted 8% even though revenue had fallen 2% versus the same period in 2018. Reported pre-tax profits fell 44% to £478m, driven primarily by a “significant” gain in 2018 that wasn’t repeated, and a charge on the revaluation of financial instruments versus a credit in 2018.
Losses have narrowed in North America, which is WPP’s largest consumer base. Unfortunately, North American is also its weakest consumer base, so returning to prior glory there will likely take time. The turnaround plan has a target to return to growth by the end of 2021.
New Chief Executive Mark Read said WPP performance was slightly ahead of internal expectations but in line with full-year guidance and three-year strategic targets.
The blue-chip company has won recent contracts and begun to strengthen its position in high-growth areas such as digital; it has expanded deals with major clients such as eBay and Instagram. WPP offers a generous dividend yield of almost 6%.
Some of WPP’s key clients include American Express, AT&T, Colgate-Palmolive, GlaxoSmithKline and Nestlé.
Company debt
One of the most off-putting aspects of WPP for potential investors is its heavy debt burden. After a recent 10% reduction, it still stacks up to more than £4.3bn.
Selling 60% of its subsidiary Kantar, a data and insight research consultancy, to Bain Capital for approximately $4bn will help further reduce this massive debt pile.
Other WPP subsidiaries include 20 companies, each successful in its own right, such as esteemed advertising agency Ogilvy, media investment firm GroupM, Mediacom, Wavemaker, Mindshare, and Finsbury.
The company has a £12.75bn market cap and a trailing price-to-earnings ratio of 18, which is up significantly from a recent ratio of 7. I believe this shows investor sentiment is improving. Earnings per share is 55.7p and the operating margin is 8%, while the profit margin is still rather low at 4.5%.
I think the beleaguered communications group is on track to make a comeback, and with its 6% dividend yield, it’s a great income stock to own in a FTSE 100 ISA. I do think it’s possibly one of the best shares to consider right now and I deem it a Buy.
