Investors seem to go through periods of communal pessimism, when downbeat sentiment punishes even companies that are doing well. I’m seeing increasing signs that such a mood is upon us now — and I love it.
I’m reminded of two of Warren Buffett’s maxims, “Be greedy when others are fearful” and “It’s better to buy a wonderful company at a fair price.” Times of maximum pessimism make both of these much easier to follow.
I’ve been impressed by advertising and PR group WPP (LSE: WPP) for a number of years, and I was surprised by the market’s reaction to its 2017 full-year results on Thursday.
The firm reported a 5.4% rise in headline pre-tax profit to £2,093m, with a 6.4% boost in headline diluted EPS to 120.4p — up 1.9% and 2.7% respectively at constant currency. These headline figures appear conservative, as reported figures are higher.
The dividend was raised by 6% to 60p, in line with the company’s targeted 50% payout ratio.
Something I like about WPP is its reluctance to sugar-coat anything, and that was highlighted by CEO Sir Martin Sorrell when he said: “2017 for us was not a pretty year, with flat like-for-like, top-line growth, and operating margins and operating profits also flat, or up marginally.“
But to put that into perspective, we’re in a very tough market right now, and with discretionary spending pared right back, pressure on the marketing world is high. To record a flat year at such times is, in my view, a mark of a well-managed company.
The share price fell 15% in the morning, coming back in the afternoon to a 12% drop at around 1,240p. And I reckon that’s a buying opportunity.
Sure, there’s a 23% fall in EPS suggested for 2018, but that would still leave us with a forward P/E of 11. And dividends look set to yield better than 4.5%, well covered by earnings.
WPP looks like a very good company, at a very fair price.
ITV has been recording some pretty decent results, with rising earnings and a progressive dividend — the payout has climbed from 3.5p in 2013 to 7.8p last year, and is forecast to keep growing to yield above 5.5%.
But the market has not been rewarding the shares accordingly, and they’ve lost around a third of their value in the past two years.
Some of that will be down to a predicted flattening of growth, with EPS expected to be largely unchanged between 2015 and 2019. But that would drop the P/E as low as 10.5, with the dividend still covered nearly 1.7 times and probably safe.
Again, I suspect that pessimism around the advertising business is also a factor, but the down spell is surely part of the natural cycle and merely a follower of general economic trends. And if you expect the economy to do well in the long run, as I do, surely you’ll expect advertising to benefit along with it?
ITV is much more than just a taker of TV advert cash these days anyway, with around 50% of its revenue now coming from other sources — and rising.
I see another oversold bargain here.
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Alan Oscroft has no position in any of the shares mentioned. 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.