WPP reduces forecast but reassures over margins

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WPP, the world’s largest advertising company, sought to reassure the market with a pledge of improving margins yesterday, after it cut, as expected, its 2011 outlook due to slowing growth in the US and the euro zone debt crisis.

Martin Sorrell’s WPP said preliminary forecasts for the full-year indicated like-for-like revenue growth of 5 per cent, compared with a previous forecast of 5.9 per cent, lowering its expectations for the fourth quarter much like its French rival Publicis.

But the group, whose ad agencies include JWT and Ogilvy & Mather, said it expected operating margins to improve more than forecast due to its still solid revenue growth and strong cost control.

WPP has been boosted this year by strong growth in the United States, an improving picture in Britain, and continued solid performances in Latin America, Africa, the Middle East and central and eastern Europe.

However, with ad agency performance largely linked to the economic cycle, ad groups such as WPP, Omnicom and Publicis have been under increasing pressure in recent months due to uncertainty over Europe’s sovereign debt crisis and sluggish growth elsewhere.

Analysts said they had already factored in a slowdown for the fourth quarter and noted the third-quarter growth was a shade below expectations, but they welcomed the improved guidance on margins.

“Although we believe uncertainty remains over organic revenue growth in full-year 2012, we view profits as relatively well-underpinned given the group’s ability to deploy cash balances on earnings enhancing acquisitions,” Numis said.

“Our target price remains broadly unchanged.”

WPP said the margin improvement “augurs well for enhanced profitability, despite more difficult economic headwinds and industry comparatives.

“Although it is too early to compile or estimate budgets for next year, despite current uncertainties, the prospects do not look dire, particularly given the record high levels of variable costs in the company’s structure.”

Mr Sorrell said 2012 would be underpinned by events such as the Olympics and the US Presidential election, but that he had concerns for 2013 as the US government looks to reduce its deficit.

WPP had already reduced its forecast in August, saying that its 2011 organic revenue growth may drift down slightly after it upgraded the outlook in April.

Third-quarter organic revenue growth was up 4.7 per cent, a slowdown from the previous quarter and a shade lower than a forecast of 4.9 per cent, according to a Reuters poll.

“The cut from 5.9 per cent to 5 was mostly expected,” Paul Gooden at RBS said. “The street was expecting 5.1 per cent anyway. And on the margins, that’s comforting.”

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