Ireland-based advertising titan WPP Group Plc. (WPPGY) is slated to release its second-quarter 2010 results on August 24, 2010.
First-Quarter Performance
On April 30, WPP Group Plc reported revenue of ₤2.078 billion ($3.234 billion), down 1.8% year over year (up 6.6% in US$) and up 0.5% on a constant currency basis due to the strength in pound sterling versus the US dollar and Euro. Excluding the impact of acquisitions and currency fluctuations, revenue was flat relative to the year-ago quarter. Profitability also improved with margins well ahead of budget and last year.
From a geographical perspective, WPP Group experienced a noticeable recovery in North America with revenue of ₤754.4 million ($1,174.5 million), reflecting an increase of 3.2% year over year on a constant currency basis. Revenue in the United Kingdom grew 0.2% to ₤251.6 million ($391.8 million), while revenue from the Western Continental Europe declined 1.1% to ₤535.9 million ($833.4 million) and from the Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe profit declined 1.5% to ₤536.2 million ($834.2 million).
From communications services sector, revenue from public relations and public affairs grew 2.8% year over year on a constant currency basis to ₤199.7 million ($311.1 million). Branding & identity, healthcare and specialist communications saw a revenue of ₤530.0 million ($825.3 million), growing 1.2%, while income from advertising and media investment management declined 0.1% to ₤805.9 million ($1,253.7 million) and consumer insight’s revenue fell by 0.2%, to ₤542.5 million ($843.8 million).
Net new business billings of £1.066 billion ($1.705 billion) were won during the first quarter. The Group continues to benefit from consolidation trends in the industry, winning several large assignments from the existing and new clients and leading all the new business league tables.
Ending first quarter 2010, trailing twelve month free cash flow was ₤924.0 million and capital expenditure, acquisitions, share repurchases and dividends were £582 million. During the quarter, the company repurchased 4.5 million shares at a cost of £28.6 million and an average price of £6.42 per share.
During the quarter, WPP Group made significant efforts to reduce its net debt level, which reached roughly ₤3.207 billion, down from ₤3.558 billion in 2009 (at constant currency).
Outlook: Management expects revenue out performance throughout the fiscal year 2010 and anticipates a 2.0% like-for-like revenue growth. Additionally, mini-quadrennial events are likely to add at least 1.0% to global like-for-like revenue growth. Margins are expected to improve at least 1.0% point to 12.7% in the fiscal year 2010 over 2009. For fiscal year 2011, management guided for an operating margin of 13.2%.
Agreement of Estimate Revisions
In the last 30 days, a lack of share driving catalysts restricted revisions in EPS estimates as, out of the 8 analysts covering the stock, none revised their forecasts for 2010 and 2011.
Magnitude of Estimate Revisions
Estimates over the last 30 days remained stable at $3.80 for 2010 and $4.30 for 2011. The estimate represents a year-over-year growth of 38.27% and 13.21%, respectively.
Our Take
WPP Group Plc remains focused on new markets, new media and consumer insights. The company has a dominant market share in many areas and has the pricing power to improve margins and sustain its future profit growth. We believe the stock’s valuation discounts all these positives and thus leaves little room for upside from current levels.
Moreover, skepticism over sustainability of growth in the U.S. later in 2010 and beyond, along with the possible impact of Eurozone debt crisis on the company’s European results remains a growth impediment. Also, a highly-competitive market, substantial international presence and dependence on limited number of clients might influence financial performances.
We, currently maintain an Underperform recommendation on WPP Group.
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