Strong results at WPP likely to feel chill of slowdown in 2012

WPP, led by Martin Sorrell, said its 2011 organic revenue growth may drift down slightly from its recently upgraded forecast, but said operating margins may improve further, leaving it pleased overall with the performance.

Shares in the group were up more than four per cent to close at 623p, a rise of 43p. They fell heavily in the run up to results over growing fears about the health of the global economy.

“People are investing in their brand,” Sir Martin said. “Most of our clients work on a calendar year basis, so we have to watch what happens in 2012. And 2013 will be the acid test.

“Some of the forecasts for 2012 look a bit conservative, but frankly everyone is so frightened at the moment that it’s understandable.”

WPP, whose ad agencies include JWT and Ogilvy & Mather, upgraded its 2011 outlook in April after it outperformed peers in the first quarter.

Since then however the shares have fallen around 25 per cent in the last seven weeks, underperforming the FTSE 100 by 11 per cent, as investors feared that the sluggish economy in the United States and eurozone debt crisis would hit corporate spending.

Many analysts said the sell off had been overdone, especially for a company that has proved itself to be quick to adapt in recent years, and Wednesday’s results showed the firm again performing solidly.

“We’re trading at five times EBITDA, that can’t be right,” Sir Martin said. He added that there was a “dissonance or disconnect” between stock markets and individual company results.

While there was no sign of customers reducing their activity yet, he said “markets look to the future, often a year or so in advance, and are rarely wrong”.

Like-for-like sales were up 6.1 per cent in the first half of the year, and up 5.9 per cent for the first seven months, putting it slightly below its recently upgraded annual forecast of at least six per cent growth.

The operating margin was up 0.7 of a percentage point in the first half and the company said the performance indicated further possible operating margin improvement beyond that.

Analysts welcomed the comments, after they had noted with caution the shrinking margins reported by rival Publicis in July as costs increased due to higher salaries.

“WPP continues to tick the boxes through a combination of generally strong growth and conservative planning,” said Richard Hunter, who is head of equities at Hargreaves Lansdown Stockbrokers.

“While the company is preparing for a challenging 2012, events such as the Olympics and the US presidential elections may provide further opportunities for growth.

“The company remains well regarded by investors, despite the difficult economic headwinds.

“Over the last six months the shares have lost some 30 per cent, as compared to a 13 per cent drop for the wider FTSE-100, and this could provide an entry point given that the market consensus of the shares as a buy is likely to be consolidated after this update.”

WPP said that any slowdown in the United States was likely to be balanced by faster growth in Britain, western continental Europe, and faster growth in Asia Pacific, Latin America, Africa and the Middle East, and central and eastern Europe.

“In summary, so far so good in 2011, with forecasts in reasonable heart, but there are storm clouds and we still have to see how the latest stock market crisis affects consumer and client thinking and actions,” the group said.

“Any impact may not be felt until 2012.”

WPP said the so-called LUV or LuVVy shaped recovery – L-shaped in Europe, V-shaped in America and the BRIC countries – “remains battered but intact”, with the world moving at different speeds both geographically and functionally, “but there but there is need to exercise significant caution. Plans, budgets for 2012 and forecasts will, therefore, be made on a conservative basis.”

Analysts at Numis said the results were broadly in line with forecasts and said now was a good time to buy.

“The group’s shares have been derated heavily to a 2012 price to earnings of eight times from fears over global growth.

“However we believe the group will benefit increasingly from its excellent emerging market and digital exposure and think they offer good value.”

Richard Nunn, analyst at Charles Stanley Securities Research, highlighted surprisingly strong growth in traditional advertising in the US and UK markets.

He added: “The outlook is cautious, especially in Western markets.

“The strength of WPP is in its exposure to emerging markets and digital sectors providing a good platform for solid growth against its peers.

“We reiterate our buy recommendation.”

PAINFUL DOSE OF COLD TURKEY

Sir Martin Sorrell said the fears that have plagued stock markets in recent weeks were probably triggered by the need to start withdrawing the massive $12 trillion fiscal stimulus brought in to stabilise the world economy following the collapse of Lehman Brothers investment bank.

He said: “Going cold turkey and weaning the economy off the stimulus drug is clearly painful and will take some time.

“The nearest historical parallel to the latest recession, which started with the sub-prime and insurance monoline crisis in August 2008 seems to be the Great Crash of 1929, which took at least 10 years to recover from – a long hard slog.”