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Why I think the WPP share price could double in 2021

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I’ve liked WPP (LSE: WPP) for years. But then founder and CEO Sir Martin Sorrell left in disputed circumstances in April 2018. At that point, he’d been the FTSE 100‘s longest-serving chief executive. Many feared the company, along with the WPP share price, might struggle without his guiding hand.

Those fears proved founded, and WPP shares had plunged 40% by March 2019. Then the 2020 Covid-19 pandemic hammered WPP far harder than most. With so much of British and worldwide business curtailed, the bottom fell out of the advertising and PR market. The WPP share price reached a low in March, down 55% on the year.

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Since that time, though, we’ve seen a very strong recovery. Those who managed to get in around the bottom are sitting on gains of about 75%. And a lot of that has come in just the past six weeks. Since the beginning of November, the WPP share price has soared by 32%, while the FTSE 100 has gained 18%. That’s serious outperformance. But what next?

On Thursday, WPP outlined its latest targets. The firm spoke of five strategic goals, including returning its core business to sustainable growth. Well, every company wants that, don’t they? The others were more meaningful, with numbers attached.

Targets for growth

WPP wants to expand into high-growth areas of commerce, experience, and technology, to provide 40% of its business by 2025 from 25% today. Costs savings come next, with a target of £600m by 2025 and two thirds of that reinvested. Then we have mergers and acquisitions up to £200m–£400m annually. And finally, there’s a new capital expenditure target of £450m–£500m per year in 2021 and 2022, dropping to a longer-term annual £300m–£350m.

WPP has a number of medium-term targets too, of which three strike me as key. And though the long term is what really counts, I think clear medium-term goals could help the WPP share price over the coming 12 months. One is to get revenue (less pass-through costs) back to 2019 levels by 2022. The firm also has a target of double-digit headline EPS growth over the next three years. And then there’s a new dividend policy of paying out approximately 40% of headline EPS.

Oh, and another big one, so that’s four things. We’re looking at a target net debt to EBIDTA ratio in the range of 1.5–1.75 times. In these days of companies accumulating debt to alarming levels, that’s something I really like. I generally prefer a multiple of 1.5 times or less. But for a strong and well-managed company, I can handle a little more debt funding than that.

Could the WPP share price double?

What does this all mean for the future of the WPP share price? Current City forecasts put the shares on a 2021 price-to-earnings ratio of 11. That’s below the long-term FTSE 100 average, and way below what I reckon a stock with solid growth prospects deserves. How much higher would a fair valuation be?

I think these latest ambitions could have analysts upgrading their forecasts in the coming weeks. And could WPP command a growth share P/E valuation closer to 22? If it shows progress on achieving its targets in the coming year, I think it could.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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