We have upgraded our rating for WPP Group Plc (WPPGY) from Neutral to Outperform based on a positive outlook for the second half of 2010.
First Half 2010 Highlights
WPP Group plc’s first half 2010 net results soared 48.1% year over year to ₤0.191 per share ($1.46 per ADR) compared with ₤0.129 per share ($0.96 per ADR) in the year-ago period – a marked improvement achieved owing primarily to revenue growth and fall in operating expenses.
Net income (pro forma), attributable to equity holders, in the first half was impressive and amounted to ₤239.7 million ($366.7 million) compared with a net loss of ₤743.0 million ($1,107.1 million) in the comparable period of 2009.
The company’s reported revenue of ₤4,440.9 million ($6,794.6 million) was up 3.5% compared with the year-ago period and up 2.7% 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 soared 2.5% in the reported period.
Management expects revenue out performance throughout the fiscal year 2010 and believes that like-for-like revenue growth will exceed seven months’ growth of 3.1% and market consensus of 2.5%. Additionally, mini-quadrennial events are likely to add at least 1.0% to global like-for-like revenue increase.
Margins are expected to grow at least 1.0%, while pro forma EPS is likely to reach the high 2008 levels. Moreover, over the long term, WPP Group targets to improve its operating income by 10% – 15%; operating margin by 0.5% – 1% annually; enhancing the percentage of staff cost to raise revenue or gross margins by 0.6% annually; converting 25% –33% of incremental revenue to profit and increasing revenue ahead of industry averages.
Upgraded to Outperform
WPP Group Plc lays a lot of emphasis 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. Despite concerns over the Eurozone crisis and sustainability of US growth, we believe that the company has the potential to deliver solid results in the quarters ahead.
In the first half of 2010, the company delivered encouraging results with earnings per share rising 48% year over year. Expectations of similar performances going forward are high as is evident from management’s outlook for the second half. Thus, we upgrade the stock from Neutral to an Outperform recommendation.