Consolidation within the advertising agency industry has resulted in the "big five:" WPP (WPP, Financial), Omnicom (OMC, Financial), Interpublic Group (IPS, Financial), Publicis Groupe (PUBGY, Financial), and Dentsu (DNTUF, Financial). Collectively, they generate nearly 30% of the world’s total ad revenue. Even with platforms like Facebook, Google, SnapChat, Twitter, Amazon and the countless other websites garnering advertising dollars, agencies will continue to be instrumental for ideas and services to both executive strategy and track the effectiveness of ads.
One company dominates the space: WPP Plc. It has a market capitalization of $20 billion and generates over $2.3 billion in annual profit on north of $20 billion in revenue. WPP is a growth-by-acquisitions story with its sales up 100% and its net income up more than 300% during the last decade. And, despite operating in more than 100 countries, it stays pretty lean with only 18% of its income going to capital expenditures.
It has been buying up smaller firms for a long time, including 52 acquisitions in 2014 and 40 more in 2015, all in order to help it transition from traditional advertising (print, broadcast media, billboards, mail) to digital media (social, mobile, internet) to better compete with the plethora of new companies entering into the space. WPP has leapfrogged Omnicom for the top spot in the industry.
Recent news has brought the stock under pressure, however.
In April founder and CEO Sir Martin Sorrel left WPP amid allegations of personal misconduct and misuse of company assets. Even though the company said in a statement that the findings “do not involve amounts which are material to WPP,” the stock remains near a 52-week low.
While the true reasons for Sorrell’s resignation will eventually come out, this company is a cash machine that can survive without its leader. In fact, it has to. Sorrell is not a young man at 73, and every executive eventually exits. This is a good time to bring in fresh leadership, especially as the advertising giant conceded that digital search and social platforms now accounted for about 30% of total advertising. That’s also where the majority of eyeballs are focused. Acquisitions have worked so far, but with 134,000 full time employees it will eventually need to get organic growth or cut its workforce.
From a purely numbers standpoint, it’s a screaming bargain. WPP pays a 5% dividend and has a forward earnings multiple under 9, as it looks to book close to $16 (USD) per share during the next two years. Not only is the stock undervalued, so is the currency it reports financial performance in as well. The British pound is trading at 1.33 per dollar, down significantly from the 1.50 to 1.70 levels the currency exchange saw just a few years ago.
At 1.5, ÂŁ6 (GDP) equates to $9 per share. That earnings number with a 15 multiple, which is where the other industry participants trade, would put the price in the $135 range, a 69% upside from its price of $79.96 (10:30 a.m. EDT).
No matter how it plays out, investors would be buying a great company at a bargain price with a ton of brand equity.
Disclosure: I am not long any stocks mentioned in this article.
