Ad giant WPP sees slowing growth

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WPP, the world’s largest advertising company, cut its outlook for the full year due to slowing growth in the US and concerns in the Eurozone, but reassured the market with signs of improving margins.

Martin Sorrell’s WPP said preliminary forecasts for the full-year indicated like-for-like revenue growth of five per cent, compared with a previous forecast of 5.9 per cent, but it said it expected operating margins to show continuous improvement.

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

“This augurs well for enhanced profitability, despite more difficult economic headwinds and industry comparatives,” the group said.

“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.”

WPP had already reduced its forecast in August, saying that its 2011 organic revenue growth may drift down slightly from its previously upgraded forecast, but it said operating margins would improve further, leaving it pleased overall with the performance.

Third-quarter organic revenue growth was up 4.7 per cent, a slow down from the previous quarter.

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

“So realistically is there going to be any change on full year numbers? I don’t think so.”

At the half year, headline operating margins improved 0.7 margin points to 11 per cent, compared with 10.3 per cent in the first half of 2010.

“Operating margins ... also improved over last year in the third quarter, despite significantly tougher comparatives,” the group said.

“As a result, our full-year operating margin should improve beyond the 70 basis points or 0.7 margin points achieved in the first half and in comparison to the budgeted operating profit margin improvement of 0.5 margin points.”

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 pressure in recent months over fears about Europe’s sovereign debt crisis and sluggish growth elsewhere.

Publicis posted 6.4 per mcent third quarter organic sales growth earlier this month but also said it expected this to slow in the fourth quarter.