2018 was a difficult year for the world's largest advertising agency, with its stock down 40% since January as the company has lost accounts, failed to secure talent recruits, suffered the troubles of Brexit -- and don't forget the CEO misconduct scandal from earlier this year. However, with all this garbage news, the company still pounds out cash. For investors looking at WPP PLC (WPP, Financial)'s stock, it has been unfairly punished by the market, and compared to its peers, is significantly undervalued.
The entire advertising industry is still in the midst of change due to new Internet and social media avenues for product sales. Yet, while anyone can open a Facebook Ads or Google Adsense account, the need for production management remains high. Thus, the need for outsourced ad agencies.
WPP's services include traditional and digital advertising, public relations and consulting. Over 70% of its revenue comes from more developed regions like North America and Europe, which could be heading for declines in the short term, but over the long-term will still be viable profit centers for ad agencies.
WPP's market capitalization is just shy of $14 billion. In the last 12 months, the company has produced over $2.4 billion in net income on north of $20 billion in sales. It has $2.9 billion in cash, a book value of $50.63 and virtually no short-sellers. In other words, smart money is not betting against the stock.
In 2019, the company expects to earn over $6.50 per share based on today's currency exchange rate. Again, if the pound sterling moves to parity levels with the U.S. dollar, then that may drop to $5.15 per share. If it moves back to historical averages ($1.60 per pound), that would put the earnings per share above $8. More importantly, it has become more lucrative to hold the stock at this point thanks to the $4 dividend, which will likely rise to $5 by the end of 2020.
Of course, from today's share price in the mid-$50 range, the stock could continue lower with the next total market correction. It is easily the most overvalued market across some sectors, yet marketing and advertising will remain a necessary component of the business cycle, which for the most part can withstand volatility.
If valued at similar multiples as its largest competitors, Omnicom or Interpublic Group, WPP would price at least 100% higher. Even if the shares lose another 20% in value with a bear market downtrend, unless you are planning on removing yourself from the investment game entirely, in five and 10 years, WPP will be worth a great deal more than today's price represents.
Disclosure: I am not long/short any stock mentioned in this article.
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