WPP: Big tech scoffs Sorrell’s lunch
WPP’s stock slumped after the firm cut its long-term growth targets. It’s another sign that the advertising industry faces structural headwinds. Alice Gråhns reports.
"For a company that helps others to communicate their message, WPP has been remarkably bad at doing that for itself," says Alex Webb on Bloomberg Gadfly. Shares in the world's biggest advertising agency plunged 15% last week, their worst fall in almost 20 years, after CEO Martin Sorrell admitted that 2017 had not been "a pretty year" and made major cuts to his long-term growth targets. The group's new long-term earnings-per-share growth target is 5%-10% a year; only a few months ago, the range was still 10%-15%. As for 2018, like-for-like sales are set to be flat, and there seems scant scope for margins to rise.
It's hardly a secret that the advertising industry is facing turbulence, says Webb. WPP, however, has long insisted that the trouble was cyclical and temporary. But last week's reduction in annual profit-growth guidance was a "tacit admission that those headwinds are more structural and therefore permanent".
How the market is changing
WPP is facing a double whammy, says Liam Proud on Breakingviews. For now, the key issue is that major consumer-goods groups such as Unilever and Nestl are under pressure from their investors to cut costs. The longer-term problem is that advertisers are "cutting out middlemen like WPP by going straight to digital giants Google and Facebook". As far as Sorrell is concerned, the digital threat is overdone, while consumer groups will return to the fold because advertising is the only way to boost revenue in a slow-growth industry. Perhaps, but the latest results imply "more pain ahead".
Technological disruption looks well entrenched, agrees Lex in the Financial Times. Digital promotion is responsible for 40% of global advertising market sales, while Google and Facebook account for half of that burgeoning sub-set.
And it's not just a question of firms going straight to the tech behemoths to advertise, as Webb points out. Marketing is shifting away from the classic model of "bombarding the media" with advertisements and turning to digital tools, such as apps, which can better trace the correlation between spending and sparking consumers' interest. Meanwhile, industries beyond consumer goods could become a headache, adds Stephen Wilmot in The Wall Street Journal. For instance, car makers, which comprised 12% of WPP's sales, will have to adapt their approach to advertising if, as widely predicted, individual car ownership gradually yields to "mobility as a service" renting by the hour through tech platforms. WPP's shares may be on a dividend yield close to 5% and a forward price/earnings ratio of under ten, but "bottom fishers need to get comfortable with a welterof uncertainties".
The battle for GKN is not over yet
Takeover specialist Melrose, which is trying to buy GKN, "finally has some competition", says Chris Hughes on Bloomberg Gadfly. Last week, GKN said it was in talks to merge its automotive unit into US car-part supplier Dana. In return for selling the unit, GKN would receive shares in its New York-listed peer. With another of GKN's main divisions already on the block, the deal would leave the British firm a "pure-play aerospace business".
This makes sense, says Hughes. GKN's shares have been weak recently. This is to some extent a result of weak profitability, but it's also because investors' appetite for a combined car and aerospace business is limited. Hence GKN's own demerger plan, as well as Melrose's hostile £7bn bid.
GKN insists that Melrose's cash-and-share offer, which values it at about £4 per share, does not reflect its scope to boost margins, says Neil Unmack on Breakingviews. That argument also implies that now is not the time to sell, although a share-based deal would provide scope for shareholders to profit from any improvements. Crunch the numbers and GKN is probably worth roughly £9bn, or 438p a share after stripping out debt. "That's not much more than Melrose's current offer [around 408p a share], which may soon be raised".
The management's credibility is also a key issue. Melrose pounced after GKN missed targets and dumped its incoming CEO, so the success of its offer depends on shareholders having little faith in GKN's management. Yet Dana, whose stock has outpaced its peers' stock in recent years, is considered well run. "The battle is not over."
Trinity Mirror "appears to have forgotten the golden rule of corporate rebranding", says Matthew Vincent in the Financial Times. The newspaper group's new name, Reach, is "nowhere near daft enough". Rebrandings are supposed to distract attention from a firm's challenges or embarrassing past. In choosing Reach, however, Trinity Mirror has served to "highlight exactly what it has a lot of, but struggles to monetise". Last year the Daily Mirror attracted 33.4 million online browsers. But the group made a mere £2.51 on average from each one.
None of the excitement around the bidding war for Sky has rubbed off on ITV's share price, says Nils Pratley in The Guardian. It sits at 160p, compared with a peak of 260p in 2015. New CEO Carolyn McCall (pictured) is eight weeks into her new job, so her "refresh" of ITV's strategy "is a work in progress, but the five-year run of special dividends for shareholders is over". Does that imply an investment splurge? If so, it's worth a shot. "This is supposed to be a golden age for television."
"Just Eat is almost unique in the online food-delivery market in that it actually makes money," says Alex Webb on Bloomberg Gadfly. It connects customers with nearby restaurants, but unlike rivals it then leaves the food delivery up to the eatery. So when it said this week it would spend nearly £50m on its own delivery services this year, the stock slipped by 15%. It "has money to play with" and hopes to tempt big fast-food chains who don't want to invest in their own couriers to use its service. But given its high current margins, and how much Deliveroo and Uber spend on their delivery fleet, shareholders "are right to feel a little indigestion".