Neutral on WPPGY yet Again - Analyst Blog


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We currently maintain a Neutral recommendation on Dublin, Ireland-based advertising company, WPP Group plc ( WPPGY ).

Over time, the company has been making concerted efforts to expand its operations in fast growing emerging markets by making strategic acquisitions and making forays into vast untapped markets in those regions. Most of the acquisitions are given effect through the company's wholly-owned subsidiaries.

In 2011, WPPGY acquired roughly 24 businesses in new markets, 32 in new media and 8 in consumer insight. These acquisitions are sure to enhance the company's competitiveness among other Group companies including Interpublic Group of Companies Inc. ( IPG ) , Omnicom Group Inc. ( OMC ) and Publicis Groupe SA (PUBGY.PK). Going forward, WPPGY plans to spend around £300 million annually on acquisitions.

Moreover, the Group is positioned well to benefit from the key industry trends of developing world advertising market as depicted in its last reported financial results and future guidance. The company posted impressive results for the fiscal year 2011 with a 19% increase reported in earnings per share and 7% rise in revenues, backed by strength across all geographical regions and communication services sector.

Over the longer-term, management expects above-industry average revenue growth, roughly 0.3-0.6 points annual improvement in staff cost/revenue ratio and 0.5 margin points or more improvement in operating margin. PBIT is expected to improve by 10%-15% p.a. on the back of margin growth and benefits from small and medium-sized acquisitions.

However, competitive and fragmented advertising/communication industry, ever risking the loss of market share and foreign exchange fluctuation is a matter of concern. Besides, the company's international operations expose it to the risks of local legislation and unstable political conditions. Furthermore, excessive dependence on a few large clients also makes the company more vulnerable to volatility and loss of business.

The current Zacks Consensus EPS Estimate for WPP plc is $5.75 and $6.30 for the fiscal years 2012 and 2013, respectively. The estimate represents a year-over-year growth of 6.84% for 2012 and 9.53% for 2013.

INTERPUBLIC GRP ( IPG ): Free Stock Analysis Report
OMNICOM GRP ( OMC ): Free Stock Analysis Report
WPP PLC ( WPPGY ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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