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WPP (LSE: WPP) was having a shocker in the FTSE 100 today (27 February). Earlier, it was down 19% and heading for its worst day since the early 1990s!
As I write though, it’s clawed back some gains and is ‘only’ down 16%. Still, at 646p, it’s WPP’s lowest level in over four years.
The stock has been a disappointment for a long time. It’s down 9% in 12 months, 14% over five years, and more than 50% across a decade. Meanwhile, dividends have been up and down over the years.
Mixed results
The culprit for today’s big drop was the advertising company’s underwhelming Q4 results and uninspiring guidance for 2025.
In the final quarter of 2024, underlying revenue fell 2.3% on a like-for-like basis, with growth impacted by weak client ad spend. Growth in western continental Europe (+1.4%) was offset by weakness in all other markets:
- North America: -1.4%
- UK: -5.1%
- Rest of World: -4.8% (including a 21.2% drop in China)
For the full year, underlying revenue fell 1% on a like-for-like basis to £11.35bn. This was slightly worse than expected, with analysts forecasting a 0.4% decline.
On the positive side, operating profit grew 2% on a like-for-like basis to £1.71bn, meeting market expectations, while adjusted free cash flow rose to £738m from £637m, driven by strong working capital management. The operating margin improved from 14.8% to 15%.
Tough out there
However, guidance for this year was downbeat, as management remained “cautious” due to the challenging market conditions. It expects underlying revenue to either be flat or down as much as 2%. The operating margin is expected to be flattish.
The stock looks cheap, trading at less than eight times this year’s forecast earnings. And there’s a decent 6% dividend yield after the company proposed a final dividend of 24.4p per share, bringing the total to 39.4p (the same as 2023).
In this case though, I think a low valuation multiple is probably warranted. The company has stopped growing and is having to restructure and streamline operations to squeeze out improvements in profit margins.
CEO Mark Read said it was a “tough market out there” today, which is a fair comment.
Would I consider investing?
WPP used to be the world’s largest ad group, but it lost that title to France’s Publicis last year. Meanwhile, US rivals Omnicom and Interpublic Group have announced a mega-merger, subject to regulatory approval, to create a massive advertising conglomerate.
I fear competition could intensify in the age of generative artificial intelligence (AI). Granted, the firm has developed WPP Open, an AI platform that uses generative AI to assist in content creation and personalised marketing campaigns. It intends to invest £300m in the platform, and last year it played a key role in securing new business wins with Amazon, Johnson & Johnson, and Unilever.
However, this AI threat creates a lot of uncertainty in my mind. Brands might use AI-driven platforms to create and optimise ads themselves, reducing their dependence on agencies like WPP. Totally new AI-based business models might emerge, disrupting legacy advertising players with large creative teams.
If I wanted to invest in advertising, I would rather consider Google parent Alphabet or Meta. Or The Trade Desk, a fast-growing programmatic advertising firm. They look better positioned for growth. WPP isn’t for me.
