A good Q1 performance showed year-on-year net sales growth slightly ahead of budget at 3.2% (constant currency, like-for-like), with the US, UK and Western Continental Europe in the vanguard. 2016 is set to be a strong year for advertising, with the normal even year effect boosted by the forthcoming Rio Olympics, UEFA Euro Football Championship and US presidential election. WPP’s strong forecast earnings growth, 12% CAGR 2015-17e (in a 10-15% target range), provides scope for rating expansion.
A recent spate of client reviews of large media budgets has come down firmly in WPPs favour, aided by the investment the group has made in recent years in integrating data and technology. North America was the best performing region in Q116, primarily reflecting good like-for-like net sales growth for Advertising & Media IM of 3.4% (+7.9% at the revenue level, the strongest performance in the group). Data IM continues to drag on the overall group result, with flat like-for-like net sales year-on-year. The Branding & Identity, Healthcare & Specialist division made the greatest progress at the net sales level, despite a subdued result in Healthcare. The April 2016 acquisition of STW in Australia gives the group the number one position in marketing services in Australia and New Zealand and makes that region the group’s fifth largest market.
Company guidance for FY16 shows like-for-like revenue growth of “well over” 3% and net sales growth of “over 3%”. With the full year benefit of acquisitions made in 2015 and a positive contribution from currency movements, forecast net sales for the year should grow well ahead of the industry, which current projections show as progressing at around 4.8% (range of 4.5-5.7%). WPP’s premium growth in earnings per share is driven by a combination of the same four factors described for some time: organic growth, margin expansion, share buybacks and small- and medium-sized acquisitions. The FY16 target for net sales PBIT margin expansion is +0.3% to 17.2% (FY15: 16.9%, FY14: 16.7%), moving towards an ultimate target of “almost” 20%.
WPP is currently trading at around a 10% discount to the other global media stocks on FY16e P/E and carries a prospective dividend yield of 3.3% – well ahead of its peers, which currently offer an average yield of 2.3%.