WPP Is Still a Buy

The leader in global advertising is undervalued and offers an incredible yield

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Apr 22, 2019
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Advertising sells goods and services. Advertising influences minds and shapes societies. Advertising as an industry is only going to grow over time. That being said, while there are certainly plenty of players in the fragmented market, WPP PLC (WPP, Financial) remains the undisputed leader. In addition, despite being up close to 15% since November, its stock is too cheap to ignore.

WPP’s revenue has doubled in the last decade and thanks to lower costs across the industry, net income has skyrocketed from 439 million pounds ($569.9 million), or 1.88 pounds per share, in 2008 to upwards of 1.9 billion pounds, or 7.46 per share, over the last 12 months. With the pound sterling at just 1.30 per U.S. dollar, that equates to roughly $2.5 billion in after-tax profit on north of $20 billion in sales.

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Even with the stock down in the last five years, there are plenty of reasons to like the company’s long-term potential. For one, group billings are on the rise, up 3.2% year over year to 55.8 billion pounds. Additionally, WPP has been focusing more on its digital marketing instead of traditional ads. Again, regardless of platform, consumers will always be subjected to advertising, especially as they continue to want free and low-cost products. The god of advertising will keep the golden handcuffs on Facebook (FB, Financial) and Alphabet's Google (GOOG, Financial) and Apple (AAPL, Financial), which will mean big money for digital ads in the decades to come.

WPP is restructuring to improve operational effectiveness by slashing over 3,000 jobs worldwide and shutting down or merging 200 offices, which will cost around 300 million pounds, but is expected to save 275 million pounds annually once finished. The company plans to reinvest the savings into getting better creative talent and to fund additional acquisitions in the digital space.

WPP management is looking for offers on its Kantar holding this month and could sell the unit for 3.5 billion pounds. Advent and Blackstone are both circling the data analytics subsidiary. The company is expected to use the proceeds to pay down debt, further boosting its total value.

More importantly, shares remain undervalued, priced at 50% discounts to most of the stock’s historical multiples. Valueline expects WPP's earnings to reach $10 per American depositary receipt by 2023, but it could happen much sooner. When it does happen, a price-earnings ratio of 15 would push shares up to $150, an 150% gain from today’s price.

Disclosure: I am not long or short WPP.Â

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