This week global advertising firm WPP (WPP) announced the appointment of Mark Read as its CEO, which in our view ends uncertainty surrounding the leadership of the company. We also think this decision indicates some steadiness for WPP as Read is a veteran of the firm having been there for over 15 years.
At the same time, we believe Read will instill more technology-driven creative thinking into the company as he was also the CEO of WPP’s Wunderman which is one of WPP’s strongest digital agencies, utilising data to add more value to and enhance the effectiveness of the agency’s creativity. Before becoming WPP’s CEO, Read served as WPP’s co-COO for five months after the departure of Sir Martin Sorrell in April.
The company’s shares lost around 7% on Tuesday after mixed first-half results. But the shares remain undervalued, according to Morningstar analysts, who assign a fair value of £15 per share, above the current price of £11.80.
In the first six months of the financial year, total revenue came in above expectations but earnings missed consensus forecasts. While weakness in North America persisted, mainly on the creative side, WPP did post year-on-year organic revenue growth in the second quarter and the first six months of 2018 for the first time since early 2017. Management, led by the newly appointed CEO, Mark Read, now expects the firm to end 2018 with organic revenue growth, unlike its initial guidance of no growth. However, while the firm had initially guided for no-change in margins, it now expects some decline in operating margin this year as it will invest more in acquiring talent and more effectively combining technology with creativity.
The Case for WPP
WPP is the largest player within the advertising space, operating in more than 110 countries worldwide. We expect the firm to maintain its market-leading position as it generates competitive organic growth, continues to make acquisitions, and increases focus on the faster-growing emerging and the overall digital ad markets.
We look for WPP’s acquisition growth strategy to continue, as the firm has consistently brought in smaller local ad agencies and quickly gained traction in other faster-growing international markets. Historically, WPP has also aggressively acquired larger players in the space such as Ogilvy, Young & Rubicam, and Taylor Nelson. Consolidation within the advertising space has resulted in the Big Five companies – WPP, Omnicom, Interpublic Group, Publicis Groupe, and Dentsu – generating nearly 30% of the world’s total ad revenue.
More recently, this consolidation has been driven by globalisation of businesses in various verticals, increasing demand not only for vertical-specific advertising expertise, but also for experience, knowledge, and clearer understanding of different cultures and regulations.
We also expect WPP to continue acquiring and investing in the growing digital advertising space, which will help the firm remain competitive.
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