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2 FTSE 100 turnaround stocks for contrarian investors in 2018

While the majority of the FTSE 100 raced away to record-breaking heights in 2017, advertising giant WPP (LSE: WPP) saw its share price shed more than a quarter of its value. But with the firm’s shares now trading at just 9.6 times earnings and kicking off a 4.6% yield, contrarian and value investors may find now a very good time to take a closer look.

The reason for investors’ disquiet towards WPP has been a rocky outlook for traditional advertising at the same time as huge customers such as Unilever have slashed marketing budgets by billions of pounds as they question the effectiveness of buying online ads through big media firms, rather than turning to tech titans such as Google.

The result for WPP has been sales that have begun to reverse with like-for-like (LFL) revenue shrinking 0.9% in the first nine months of 2017. Reported revenue was slightly up on the year before in constant currency terms due to acquisitions, but at just 1.1%, this growth is far below global GDP growth.

Yet underneath these less than stellar results, WPP appears to have a future after all. This is because the group is fast transitioning to focus on emerging markets and its digital business, with revenue from online services up 2% on a LFL basis and 7% in constant currency terms due to acquisitions. For the first nine months of 2017, these digital sales accounted for a full 41% of revenue, up from 28% in the year prior.

If WPP can continue to grow its digital sales and prove the effectiveness of its efforts to large multinationals, contrarian investors could find now a very attractive entry point into a highly profitable business with bumper shareholder returns through dividends and share buybacks.

Adapting to changing habits 

Investors also fell out of love with broadcaster ITV (LSE: ITV) last year with the firm’s shares dropping by some 13% as advertisers trimmed their TV budgets and investors began to question the longevity of the traditional broadcaster’s business model.

But there is a case to be made that investors have oversold ITV and may be undervaluing a business that is rapidly changing itself to better suit the 21st century. In the nine months to September, a full 40% of the company’s revenues came from its studio division, which creates content both for ITV and other media groups in the UK and overseas.

Sales from this division are growing quickly and were up 9% in the nine months to September. In addition, ITV’s management is adapting to new consumer viewing habits by beefing up its online presence. This is evidently working as online viewership rose 41% year-on-year with revenue from these eyeballs rising 8%.  

But it must be said that the group’s overall external revenue did fall by 1% in these three quarters as revenue from traditional TV spots continued to fall. Yet with the company’s shares trading at just 11 times consensus forward earnings while offering a 4.2% dividend yield, hardy contrarian investors could find highly profitable ITV a bargain in 2018 if management can continue to shift to online ads and expand its studio output.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended ITV. 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.