WPP warns on results day

A number of political and corporate pressures continue to threaten corporate growth, WPP's boss and founder Sir Martin Sorrell has warned. Despite the rocky backdrop, the advertising giant has managed to report an encouraging start to the year, driven by North America. Yet, after reaching all-time highs earlier this month, the shares are now relying on a key support level holding.

No stranger to shareholder activism against his huge salary, Sorrell defended his £70 million pay packet just hours before the company he founded reported encouraging first-quarter results. Netting around £63 million worth of shares this year, Sorrell explained to BBC Radio 4's Today programme that his remuneration is based on WPP's performance and said he is "not embarrassed" of the success off the firm, which has doubled in value over the last five years.

Fueled by a particularly strong performance in North America, reported billings jumped 8.3% to £11.9 billion in the first quarter, underpinning double-digit revenue growth to £3.1 billion. Stripping out the effects of currencies, revenue rose 9%. WPP's UK and European divisions also did well and organic growth of 3.2% outperformed both peers, Omnicom and Publicis, and broker expectations.

Divisionally, Branding & Identity, Healthcare & Specialist Communications stood out, with sales growth of 13% to £827 million contributing 31.6% to group revenue. Advertising and Media Investment Management grew revenue by 5.7% to £1.1 billion, and over 38% of group revenue came from direct, digital and interactive, which remains on track to hit its 40-45% target over the next five years.

WPP is driving growth through an active acquisition strategy, with 26 transactions going through in the first quarter. Eight deals give the advertising group exposure to new markets, while 17 boost its presence in the quantitative and digital space. Earlier this month, WPP bought Australia's STW Communications Group.

While free cash flow reached over £1.2 billion in the 12 months to 31 March, heavy capital expenditure, acquisitions, share repurchases and dividends cost the group £1.9 billion. WPP also spent £62 million on share buybacks in the quarter. Net debt increased by £701 million to £3.7 billion.

A cocktail of threats

While operations look encouraging, Sorrell warned that a "cocktail" of threats are stopping companies splashing out on advertising.

"The grey swans - or known unknowns - haven't got any whiter and the black swans - or unknown unknowns - are still there," he said.

In his revered industry overview, the businessman points to a 'Leave' European Referendum vote resulting in GDP weakness and voices concerns over a re-emerged "Grexit" and political tensions in the Ukraine, Middle East and Africa.

Despite difficulties in emerging markets Brazil, Russia and China, Sorrell remains "unabashed bulls on all three". This political climate is encouraging corporate conservatism, however, and investment as a proportion of GDP is shrinking.

So WPP has done well to achieve growth against this difficult backdrop. Numis analyst Paul Richards has maintained his 'add' recommendation and 1,775p target price, implying 12% growth from the 1,582p WPP slipped to on Thursday.

Surging by over a quarter to an all-time high of 1,690p earlier this month, WPP's share price is down 6% since. It will be interesting to see if support at current levels holds.

Richards maintains his 3.5% organic growth forecast this year and guidance for a 30 basis-point margin increase, although he admits there are a number of moving parts to his estimates.

The analyst has more-than-doubled his acquisitive growth guidance to 4.5% and foreign exchange benefit to 3.5%. This feeds through to higher revenue growth of 11.5% and boosts the bottom line, with pre-tax profit guidance increasing by £50 million to £1.85 billion in 2016 and £1.95 billion in 2017.

An increase in the number of shares and higher tax leaves earnings per share (EPS) forecasts unchanged, however, at 105p and 113p in 2016 and 2017 respectively. That puts WPP on 15 times forward earnings.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.