When FTSE 100 advertising and PR giant WPP (LSE: WPP) parted company with founder and chief executive Martin Sorrell, many observers feared for the company. And they weren’t wrong, at least in the short term. Between Sorrell’s departure in April 2018 and February 2020, the WPP share price crashed by a third.
But there’s more to the story. WPP shares had already been falling, having reached a peak in early 2017. And then Covid-19 struck and, so far in 2020, the price is down 44%. The FTSE 100 itself has been turing south again, and it’s now dropped more than 25% in 2020. But the WPP fall is one of the worst in the UK stock market’s top tier.
The past two years have brought earnings falls, with another tough year on the cards in 2020. If forecasts prove accurate, this year’s EPS will be down more than 50% from 2017. The company has slashed its dividend too. But if we look beyond the current year, I think the firm’s long-term future is positive.
Third quarter update
WPP released a Q3 update Thursday, and it’s essentially a list of falling numbers. Reported revenue for the quarter is down 9.8% on the same period last year, with the like-for-like figure showing a 5.5% drop. Revenue, less pass-through costs, is looking tougher, down 11.9% overall and down 7.6% like-for-like.
That’s arguably a little softer than the nine-month figures, so things might be improving. Reported year-to-date revenue is down 11.5% with like-for-like falling 9.5% (down 10.8% and 8.9%, less pass-through costs).
The 2020 numbers so far are clearly not great. But they look to me to be largely in line with full-year forecasts. Investors didn’t much like the look of the update at first, dropping the WPP share price 4.4% in early trading. But, as I write, it’s back to around a 2% slip on the day, so maybe things aren’t quite so disappointing on a closer look.
Looking to the brighter potential future, chief executive Mark Read spoke of the new businesses the firm has signed up this year. It includes deals with Alibaba, Dell, HSBC, Intel, Unilever and Whirlpool. In the long-term, the big firms, including FTSE 100 giants, are surely going to stick with the proven winners.
FTSE 100 winner?
Right now, WPP shares are on a forward P/E of around 12. That’s below the FTSE 100 long-term average, and we might expect to see a lower valuation this year. But I think it’s very wrong to value a company in such a short-term way. If the shares are valued so modestly in what looks set to be probably the toughest year for business in many decades, how cheap will they look when we’re out of the crisis?
Forecasts for 2021 give us some clue. They have to be treated with some caution, of course. But a prediction for 30% EPS growth next year would drop the P/E to nine. Analysts expect the dividend to pick up too, to present a well-covered yield of 6.5%.
I reckon WPP is till the best in the business. And I rate it one of the FTSE 100’s best buys today.
