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Thursday, August 27, 2009

WPP: "Little evidence of better heads and stouter hearts"

Global advertising behemoth WPP reported Interim results yesterday, with "like-for-like" revenue down 8% Y/Y versus an initial corporate plan of down 4% Y/Y - link here. Overview:

By region:

Regional advertising trends and expectations for 2010:

Given our recent posts on the economy and old media, we thought we'd share relevant commentary from WPP:
  • "The impact of the recession on the Group’s profitability in the first half was severe. Although action was taken to reduce staff and discretionary costs, such as travel, training and personal costs, as revenues came under pressure, this reduction was insufficient as revenues fell faster than budgeted. Like-for-like revenues were budgeted to fall by almost 4% in the first half of 2009 and fell, in fact, by over 8% with the deterioration against budget even greater in the second quarter, which was a surprise."
Like many other companies, WPP continues to reduce headcount and "the second-half is forecast to show a marked improvement in profitability, both absolutely and in terms of maintaining second half margins at prior years levels."
  • "This relative improvement [cost reductions to improve margins] should be reinforced as we cycle easier like-for-like revenue comparatives. Sequential quarter-to-quarter comparisons are forecast to stabilise, as are year-to-year comparisons, just like recently released country GDP figures. However, although there is little doubt that CEOs and CMOs feel better about the general economic environment, Armageddon or Apocalypse now having been averted, there is little evidence of better heads and stouter hearts translating into stronger order-books or investments – at least, yet. Things look better, as they naturally should, partly because of easier comparatives."
  • "Although it is still very early to budget or forecast what may happen in 2010, top line revenues will probably be “even Steven”, despite the positive impact of the Winter Olympics in Vancouver, the World Expo in Shanghai, the Asian Games in Guangzhou, the FIFA World Cup in South Africa and the mid-term Congressional elections in the United States."

Thus, WPP experienced worse-than-expected trends in the June quarter and pointed to "little evidence" of current improvement. However, the company is optimistic that Y/Y performance in 2010 will be flat on easier comparisons. The good news for investors is that WPP has a long history of excess cash flow generation with increasing dividends and share buybacks, which continued in F1H09:

Conclusion: while guarded economic optimism is emerging in the stock market, trends remain difficult and, in WPP's case, below plan. We believe a cautious investment strategy remains prudent, with a preference for low multiples, excess cash flow, and current-year growth.

Happy investing,

Jeffrey Walkenhorst

Disclosure: none.

© 2009 Jeffrey Walkenhorst
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