UK Edition
Questor: WPP is not a sitting duck for Google and Facebook so hold on to its ‘dirt-cheap’ shares
Questor share tip: fears that WPP will lose swathes of business to the online giants look exaggerated
“WPP’s dirt-cheap valuation implies that something is going badly wrong. But this is not a business that’s collapsing.”
So said Colin McQueen of Sanlam FOUR, the fund manager, in response to the 33pc fall in the advertising group’s shares since Questor tipped them on the basis of his holding in March last year.
“The performance of the business does not warrant this,” he said. “The stock is priced for shrinkage but in fact sales are still growing, albeit slowly.” Revenue growth is about 0.5pc-1pc currently, disregarding the effects of foreign exchange rates.
He said there were various reasons for investors’ aversion to WPP but most were overstated.
While the firm has more exposure than rivals to giant consumer brands such as Unilever, which have been cutting advertising expenditure, McQueen said he expected this trend to bottom out soon. “Some US firms have talked about increasing budgets again,” he said.
There has also been weakness at WPP’s research arm, Kantar, while the group lost some major accounts last year. But McQueen said this was part of the normal ebb and flow of the sector and the firm had been winning accounts again this year.
Investors do have a deeper fear, however: that digital interlopers such as Google and Facebook will permanently take custom from the traditional advertising firms.
“We think the evidence for this is not compelling – if it were, revenues would be falling across the industry, which they are not,” the fund manager said.
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“The proportion of digital ads bought via agencies such as WPP is roughly stable, while surveys suggest that more than 80pc of customers think agencies add value in terms of creative input, buying power and giving clients an impartial view. Even the likes of Google itself use traditional agencies – their need for such skills suggests that WPP and its rivals do add value.”
He said the agencies were trying to increase their digital capabilities, adding: “We think they are capable of adapting. Markets tend to overreact to any fear of competition from Google and the others. We see headwinds but no existential threat to the agencies.”
He pointed out that WPP shares were trading at less than 10 times earnings and yielding 5.2pc, with a free cash flow yield of 8.5pc-9pc.
McQueen also welcomed the recent appointment of Mark Read as chief executive to replace Sir Martin Sorrell.
“It’s positive to have fresh blood,” he said. “Read is a good appointment. As an internal candidate he offers a smoother transition, while the strategic review he has announced could accelerate change. It could involve some restructuring costs but should cement WPP’s industry leadership.”
Questor says: hold
Ticker: WPP
Share price at close: £11.46
Update: AmerisourceBergen
Another stock to have been hit by fears of new competition from the online giants is AmerisourceBergen, also tipped here in March 2017 following a conversation with Colin McQueen.
Amerisource is a drugs distributor, and investors have been rattled by reports that Amazon plans to enter this market. McQueen said it had bought an online pharmacy but seemed reluctant to compete with America’s three large drugs wholesalers.
“Markets tend to get nervous when Amazon appears but it will find drugs distribution hard to crack,” he said. “The three incumbents control 95pc of the market and are highly efficient, with margins of 1.5pc, so there’s little scope for Amazon to undercut them. Then there are restrictions on the storage and handling of drugs: you can’t just put them in an Amazon warehouse with everything else.”
- Questor archive: telegraph.co.uk/questor
The firm has also been caught up in litigation over America’s opioid epidemic. Similar litigation has resulted in small fines historically, but the issue is very political at present.
McQueen said Amerisource had been performing well and 8.5pc sales growth was expected for the year to September. A price-to-earnings ratio of 13.4 and free cash flow yield of 8.5pc are below the stock’s historic levels and the wider market.
Questor says: hold
Ticker: NYSE: ABC
Share price at 6pm: $90.23
Early print editions yesterday incorrectly stated Parity’s closing share price as £11.25. The correct price was 11.25p