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WPP - recovery in marketing spending boosts Q3

Sophie Lund-Yates, Equity Analyst | 28 October 2021 | A A A
WPP - recovery in marketing spending boosts Q3

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WPP plc Ordinary 10p

Sell: 813.00 | Buy: 814.00 | Change -78.20 (-8.76%)
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WPP has had a 'very strong' quarter, with net revenue rising 15.7% on a like-for-like (LFL) basis to £2.6bn. Compared to 2019, LFLs are up 6.9%. The improvement reflects the fact 'clients across all sectors and geographies are making significant investments in marketing, particularly in digital media and ecommerce services'.

As a result, full year guidance has been raised again. WPP now expects net revenue of 11.5% - 12.0%, compared to previous guidance of 9-10%. Operating margins will be slightly above 14%, also ahead of previous guidance.

The shares rose 6.3% following the announcement.

View the latest WPP share price and how to deal

Our View

WPP has turned a corner. We're the first to admit this has happened faster, and more aggressively than we'd predicted.

After a year when above-the-line marketing and advertising spend turned off like a tap, WPP and its huge global agencies are benefiting from a global glut of corporate wallet-loosening.

Net revenue has come on leaps and bounds, not least thanks to WPP's laser-like focus on boosting its digital marketing offerings. This is where the pandemic might have helped with the long-term picture. It forced the group to step up streamlining efforts and refocus itself. The new plan involves focussing on faster growing end markets (like how to help clients succeed online) and technology. £600m will be spent over the next few years, most of which will go on new staff, technology and incentives. It all sounds like the right plan, because Covid has only accelerated the shift to digital marketing. We're genuinely impressed with momentum so far.

To see all business areas ahead of pre-pandemic levels is not only impressive, but a genuine relief. There was a moment when we questioned if WPP would be able to re-ignite its mojo after some lacklustre trading even before the crisis.

The other bit of good news is that the balance sheet is in much better health than before the crisis. That provides some level of shelter while the group continues with its strategic pivot. WPP feels confident enough to continue its already hefty share buy-back scheme.

But before it can reach a home stretch, it's worth remembering that WPP's agency business is still being nibbled away at, and it's turning to acquisitions to keep growth coming. WPP needs to prove that recent momentum can be harnessed and continued. The other sore point, free cash flow, is expected to fall over 70% this year. That isn't unsustainable if it's a short-lived trend, and analysts expect that to be the case. Nonetheless, it is something to watch.

There's little to argue with when it comes to WPP's progress. We previously said that long-term prosperity rests on a swift, and accurate, execution of the new strategy. We think this quarter proves WPP is moving at a significant pace, reducing, though not eliminating, that worry. The price to earnings ratio of 11.8 doesn't appear demanding - but keep in mind the work isn't over yet, so there could be ups and downs.

WPP Key facts

  • Price/earnings ratio: 11.8
  • Ten year average Price/earnings ratio: 12.1
  • Prospective dividend yield (next 12 months): 3.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading statement

There was double digit like-for-like (LFL) sales growth in all regions, but the biggest rise came from Western Continental Europe, which rose 21.5% to £562m.

The group's Global Integrated Agencies saw net revenue LFLs up 13.5% reaching £2.2bn. There has been "strong structural growth" in the group's digital and commerce media services. All agencies within this division are up compared to pre-pandemic levels.

Good demand for specialist PR helped Public Relations net revenue rise 16% to £231m. Brand Consulting and healthcare media businesses meant Specialist Agencies were the best performer, with net revenue up 41.5% to £224m.

Net debt at 30 September 2021 was £1.6bn, compared to £2.3bn a year ago.

The group expects to complete the £600m buyback in December, with £448 already completed. WPP intends to continue the buyback at a similar rate up until late February 2022.

Find out more about WPP shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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