Since hitting £19 in February last year, shares in advertising giant WPP (WPP) have been in a tailspin. They have been hit by slowing growth, falling margins and the departure in early 2018 of founder and chief executive Sir Martin Sorrell.
Today’s third quarter update adds to the litany of disappointments served up by the firm as new chief executive Mark Read announces a 1.5% fall in sales and says full year sales could slip by as much as 1% compared with a target for 0.3% growth just three months ago.
MARGIN PRESSURE
The operating margin is now expected to fall between 1% and 1.5% compared with a previous prediction of a 0.4% decline. In response its shares fall 16.8% to 878.8p having earlier traded as low as 818p.
It has lost some high-profile clients in recent months, perhaps most notably the creative account on Ford which has gone to Omnicom’s BBDO agency having previously been held by WPP for 75 years.
News that veteran finance director Paul Richardson will step down after more than two decades in the role in 2019 is hardly likely to bolster market confidence.
AJ Bell investment director Russ Mould says: ‘New CEOs often take the opportunity early on to rebase expectations for the business under their charge.
'This is often the case when they are taking over after turbulent period, something which is true at WPP where founder and former chief executive Martin Sorrell was ousted earlier this year.
‘What’s concerning about the firm’s poor performance and downbeat guidance is how out of step it is with the wider peer group. The likes of Omnicom and Publicis have already delivered well-received third quarter trading statements.’
KANTAR SALE ‘LOGICAL’
Although noting the planned sale of market research arm Kantar had been perceived as a ‘logical’ move for some time, Mould reckons Read will have to deliver more at a December strategy update to get shareholders back on side.
Liberum analyst Ian Whittaker, despite reiterating his ‘buy’ advice and increasingly punchy £17.50 price target, is concerned.
He says: ‘It would be tempting to dismiss WPP’s performance as a temporary blip, as happened with Publicis at Q2, but the fact that the company has dragged down its guidance, with an especially sharp decline in the margin guidance, suggests something else.
‘We think the issue here is not Creative, which is quite low margin, but Media, which is high margin (we think 25%+ for WPP) and which is the one part that benefits from scale as having more advertising spending allows the Media buyer to negotiate better rates for advertisers.
'That is quite worrying: none of the other groups have suggested it is an issue for them so WPP seems to be losing clients for a specific reason.’