WPP Plc: Buy, Sell Or Hold?

I’m always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at WPP

Today I’m evaluating WPP (LSE: WPP) (NASDAQ: WPPGY.US), a British multinational advertising and public relations company, which currently trades at 1209p. Here are my thoughts:

1. Financial strength: WPP is in solid financial position with a net debt/EBITDA ratio of 1.7; gearing of 40%; and interest cover a sufficient 6 times. Also, the company’s long-term debt is rated Baa2 — medium grade and subject to moderate credit risk — by Moody’s.   

2. Profitability: WPP has performed well this past decade growing revenue per share, operating profit per share, adjusted-earnings per share and dividend per share by compound annual growth rates (CAGR) of 9%, 11%, 10%, and 17% respectively. Operating profit margin has been consistently around 12%; while return on invested capital (ROIC) –a measure of how well a company uses it money- has been adequate around 9% per year.

3. Management: Martin Sorrell is the company’s founder and has been its chief executive since 1986. He is largely credited for building WPP into the largest advertising and marketing services group in the world today.   

4. Long-term prospects: WPP is the world’s largest advertising company by revenues, and employs 162,000 people in over 100 countries. It owns around 150 advertising, market research, and public relations companies such as Oglivy, Burson-Marsteller and Hill & Knowlton. It services the biggest corporations in the world including 350 out of 500 of the Fortune 500 companies, all 30 companies in the Dow Jones 30, and 63 out of 100 of the Nasdaq 100.

The company’s strength lies in the vast array of companies it owns. With hundreds of companies at its disposal, WPP can offer clients a wide range of services specific to their needs. Three to four different companies can work for a single client, providing clients with a truly integrated communications service.

WPP is coming off — according to the company — a second straight “record” year where in the company reached new highs in revenue, earnings, margins and profitability. Revenue reached over £10bn and was higher than any of the company’s competitors for a fifth straight year; operating profit grew over 7%; and operating margin reached a new high of 14.8%; while dividends increased by 16% to a record level 28.5p.

Also, WPP now derives 30% of its revenue from high-growth regions Latin America, Africa & the Middle East and Asia-Pacific. Revenues from these regions have grown by 13% and 9% in the last two years respectively The company’s objective is to increase the proportion of revenue from emerging markets to around 35%-40% of group revenue in the next two to three years.

5. Valuation: WPP shares are trading at a forward price-to-earnings (P/E) ratio of 15, slightly higher than its 10-year P/E average of 13; while its P/E based on the company’s 10-year average earnings already stands around 20.  

My verdict on WPP

WPP is quite an enticing company. It possesses a narrow competitive advantage over its peers; it has a very good track record of growing revenues, earnings and dividends, while also earning solid returns on invested capital, and has a good growth profile. However, the question is it cheap enough to buy? WPP shares have already increased by more than 30% in one year and it is already a bit on the pricey side.

Nonetheless, I think WPP still offers good value. It has grown adjusted-earnings per share by 14% per year in the last three years; I think it would likely be able to sustain a high level of growth in the next few years with its strong presence in emerging markets. Moreover, it returns a dividend yield of 2.6%, covered 2.5 times, implying further scope to grow. Therefore, I think one can reasonably expect returns of at least 10% per year holding WPP shares for the long-term, especially if the macro-economic environment continues to improve.

 So overall, I believe WPP at 1,209p looks like a buy.

More FTSE opportunities

As well as WPP, I am also positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.