We recently downgraded our rating for WPP Plc (WPPGY) from Outperform to Underperform primarily due to skepticism over sustainability of growth in the U.S. later in 2010 and beyond, and the possible impact of Eurozone debt crisis on the company’s European results.
First Quarter Highlights
WPP Group Plc reported revenues 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 attributable to the strength in pound sterling versus the U.S. dollar and Euro. Excluding the impact of acquisitions and currency fluctuations, revenues were flat compared with the year-ago quarter level. Also, profitability improved with margins being 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 Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe reported a decrease of 1.5% to ₤536.2 million ($834.2 million).
Management expects revenue outperformance throughout the fiscal year 2010 and anticipates 2% 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% point to 12.7% in fiscal year 2010 over 2009. For fiscal 2011, management guided for an operating margin of 13.2%.
Downgraded to Underperform
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 future profit growth. We believe the stock’s valuation discounts all these positives and thus leaves little room for upside from current levels.
Moreover, a highly-competitive market, huge international presence and dependence on limited number of clients remain the prime causes for concern and may prove to be detrimental to the company’s growth. We, thereby downgrade our recommendation on WPP Group to Underperform.