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This S4 Capital target price is close to the share price. Here’s why I’d still buy now

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Digital advertising/marketing agency and media business S4 Capital (LSE: SFOR) has been in the press a lot lately. Last week, broker Barclays initiated coverage. It set an S4 Capital target price of 475p. That’s above where the shares sit currently, but not by much.

Although S4 Capital isn’t far off the latest target price, I would still buy it now. Here’s why.

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Strong results likely

S4 Capital’s final results are due next week. We already know roughly what to expect. The company previously posted strong performance in its first three quarters. It also noted that results were expected to be “well in line with market expectations”.

This week, S4’s leader Sir Martin Sorrell was told an interviewer: “We will be at the north end of the market’s estimates of 15 to 20% like-for-like growth during Covid”.

That suggests that the results next week will be strong. The company has repeatedly said its current three-year plan calls for an organic doubling of revenues and profits. To achieve that, this is the sort of annual growth I would hope to see.

But what’s interesting here isn’t just the growth. Sorrell clearly knows how to grow companies, as he proved when building WPP. That’s why analysts have attached an S4 Capital target price above its current level. What attracts me is that S4 is able to register such growth despite the economic challenges of the past year. I take that as a vindication of its digital model. The agency is well matched to the current environment because it has been created for the contemporary ad marketplace.

Other companies are moving into the space, though, which could reduce S4’s ability to win and grow client relationships. Sorrell’s prominence also underlines how central he is to the S4 story, but that could be a risk too, with a lot of expectations riding on one person.

S4 Capital target price and growth

Sorrell’s approach at WPP was to grow through acquisition. He has brought the same strategy to S4. But acquisitions are now termed mergers and typically paid for in shares as well as cash.

That means S4 shares are a currency. If they hit higher prices, bigger deals would be easier. In his interview this week, Sorrell dangled a tantalising prospect. He talked about the future possibility of rolling the firm into a larger company, such as Globant. By doing so, he reckons S4 would be a more rounded competitor to Accenture.

The S4 Capital target price doesn’t reflect its actual price, but as City confidence in the company grows, a higher share price could enable larger deals. I don’t think it’s any accident Sorrell mentioned Globant now – he’s signalling his huge ambition for S4. As an S4 shareholder myself, I’m hoping that if he’s able to grow it as he did WPP, I will also benefit.

But it might not work out like that. The share price has already risen sharply over the past year, pricing in expectations of success. This means that if expansion stalls or the results disappoint, the shares could fall sharply. With digital assets keenly sought, prices could go up to levels that make S4’s expansion less financially viable.

I’ll certainly be watching next week’s results with a keen eye.

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christopherruane owns shares of S4 Capital plc. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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