WPP plc

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

WPP is a global advertising and public relations conglomerate, that offers marketing and communication services worldwide.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

WPP has recently published its 2023 preliminary results and has updated its 6-K fillings in February and December 2023 which show positive revenue growth and a focus on transformation and restructuring.

Business Overview

WPP is a large global advertising and communications company, whose primary operations encompass a diverse range of marketing services including:

  • Public Relations: Providing reputation management and strategic communications.
  • Advertising: Developing and implementing advertising campaigns across all media channels.
  • Specialist Agencies: Offering specific expertise in technology, creative design, and brand management.
  • Integrated Agencies: Offering services integrating the full range of the group’s capabilities.

Geographic Distribution of Revenue:

  • In 2022 the company’s revenue was globally diversified, with 38% in North America, 34% in the UK and Western Europe, and 29% in the rest of the world, including Latin America, Asia-Pacific, Africa, and the Middle East. In 2023 the percentages shifted with 38% in North America, 33% in the UK and Western Europe, and 30% in the rest of the world

The marketing industry is experiencing continuous transformation driven by several key trends.

  • Digital Transformation: There is an increasing emphasis on digital marketing and data-driven strategies.
  • WPP is focusing on growing its digital revenues, with digital revenue contributing nearly 56% of total revenue in 2023, up from 54% in 2022. The company is aiming to increase to 60% over the next few years.
  • Content Creation & Social Media: Content marketing is becoming paramount, especially with the proliferation of social media.
  • Evolving Advertising Models: The industry is shifting to customized and targeted advertising.
  • Focus on Data & Insights: Data analytics and strategic insights are crucial in developing marketing strategies.

Competitive Landscape

WPP operates within a highly competitive global market, where it faces numerous competitors, each with its strengths.

  • Global Advertising and Communications Conglomerates: Major competitors include Omnicom, Publicis, and Interpublic Group (IPG).
  • These global rivals boast significant revenues and operate across numerous countries and sectors.
  • Independent Agencies: There is increasing competition from creative and digital agencies that are smaller and nimbler than WPP.
  • Consulting Firms: Consultants like Accenture and Deloitte are expanding into the marketing field and are increasingly becoming competitors.
  • New Media Platforms: Technology giants like Google and Meta also present growing competition.

What Makes WPP Different?

WPP is among the leading advertising groups globally, boasting a comprehensive network and large, diversified client base.

  • Global Reach: WPP has a strong geographical presence that allows it to serve global companies worldwide.
  • Integration Capabilities: WPP provides an integrated suite of services that are difficult for clients to replicate in-house
    • Strategic Partnerships: The company leverages key partnerships and invests heavily in data and technology, improving the overall effectiveness of the products.

Moat Evaluation

While WPP is a formidable player in its sector, the sustainability of its competitive advantage is not as well-defined as some of its peers.

  • Scale Advantage: WPP’s size allows it to spread costs over a large client base.
  • However, the company’s margins and ROIC have not been the best and the company has been aggressively trying to improve on these. They are targeting margin improvements of 0.5% to 1% annually which is good, but suggests the business isn’t as efficient as one would like to see. The most recent reports have seen some improvement on these.
  • Switching Costs: There are only modest switching costs for clients, and many clients are happy to change if other agencies have more creative pitches.
  • This is evidenced by the fact that its returns on capital has been lower than its competitors. They have been restructuring their business to reduce costs and increase efficiency.
  • Brand Value: WPP has a strong brand and significant reach, though these may not always translate to a significant pricing premium or lock-in.
  • This is because the branding is not as strong as some companies that operate in niche markets, and their brand value hasn’t translated to sustained, high returns on capital.
  • Technological Barriers: Whilst it’s investing heavily in data and technology there aren’t barriers to entry created by these investments.
  • They also need to compete with technology giants like Meta and Google, which have much bigger data sets.

Moat Rating: 2/5 WPP’s strong brand and global network are partially offset by moderate switching costs, competitive market conditions, and ongoing technological changes. While its size gives it some advantage, it does not translate to a durable moat.

Risk Factors

Several factors could pose a risk to WPP’s moat and business.

  • Technological Disruption: Changes in digital advertising and content creation technologies can render their services less relevant.
  • The business is focusing heavily on digital and AI, which implies that it’s aware of these threats.
  • Intense Competition: There are strong competitors that could erode margins and market share.
  • Client Concentration: Reliance on a few major clients could make it vulnerable to customer churn.
  • Although they have a broad client base, the risk cannot be eliminated.
  • Economic Downturns: Economic slowdowns might reduce spending on marketing and advertising.
  • Talent Management: Their business heavily relies on creative talent to generate profits. It’s important that they retain and attract the best talent.
  • Data Security & Privacy: Recent data privacy concerns and laws have put them under regulatory scrutiny. Companies have to act according to data privacy legislation, which will force them to spend more on compliance.
  • Debt and Leverage: WPP carries substantial debt from its acquisitions which makes them vulnerable to an economic downturn.
  • WPP recently reported that the group’s financial position had strengthened with lower debt level and a higher average maturity period

Business Resilience

  • Flexibility: WPP is trying to be more flexible in the rapidly changing market and is investing in new technologies that provide better services and improve productivity.
  • Global Diversification: Its global geographic presence means that risk is diversified across many countries, and it is less reliant on a single market.
  • WPPs has also been restructuring and divesting some businesses and subsidiaries to improve efficiency.

Financial Analysis

  • Income Statement: WPP reported its preliminary full-year results for 2023 which showed a revenue of £14.4 billion, an increase of 3% at a constant level. The company reported strong growth in some regions, offset by weaker performance in its technology segment. They also had an improved adjusted operating profit margin of 15% and reported net debt of £2.8 billion.
  • In the 2023 report, the financial statements were restated to include the impact of hyperinflation in Argentina. The numbers from 2021-2022 were restated.
  • In the fourth quarter of 2022, their results were impacted by the war in Ukraine and currency translation.
  • Profitability: The firm’s gross profit margins are good at over 90%, which speaks to the pricing power of their business. But, the operating and net profit margins are relatively low in the mid-teens and the return on invested capital has also fallen from 17.7% in 2018 to 10.1% in 2023.
  • Balance Sheet: The company has a stable and positive amount of cash and cash equivalents in their balance sheet. At the end of 2022 it was 2.23 billion GBP. The group’s debt has decreased to 2.8 billion GBP from over 5 billion in 2020, showing some improvement. They also have a relatively big goodwill component, with goodwill at almost 6 billion GBP, with acquired intangibles at over 2.7 billion GBP, which reflects the large amount of acquisitions they have been doing.
  • The company’s current liabilities are almost equal to current assets. In the short term, their solvency position is good, but they don’t hold many liquid assets to provide immediate cover.
  • Cash Flow: WPP produces a significant amount of positive operating cash flow. However, free cash flow remains a smaller component, because they continually invest in the business, both in CapEx and in acquisitions. They also have negative cash flows in financing activities due to their high debt levels and some dividend payouts.
  • The company’s reported net debt to EBITDA is around 1.9x, which is still a bit high for a company that isn’t operating in a low-risk, very predictable business like a utility company.
  • WPP intends to reach a net debt-to-EBITDA ratio of 1.5-2 times.

Understandability Rating: 3/5

The core business of WPP, providing advertising and marketing services, is fairly straightforward, and its geographic reach is also easy to grasp. However, given the numerous acquisitions and partnerships, it’s complex to analyze and predict its long-term financial performance. WPP is trying to focus more on growth through organic means and not rely too heavily on acquisitions.

Balance Sheet Health: 3/5

While WPP has made improvements in its financial health by reducing its total debt, its interest coverage remains moderate, and its capital structure can be improved to make it more suitable for unexpected market turmoils. The amount of goodwill also reflects that they have made many acquisitions, and that may put them at risk of large write-offs. The business has recently posted good returns on equity, but their ROIC and margins should be higher.

In the future, they are going to focus on improving profitability and margins.

Latest News and Concerns:

  • Restructuring Plan: As part of its restructuring program, WPP plans to reduce its global workforce by approximately 1,600 roles as it consolidates operations, aiming to generate cost savings and simplify its organizational structure.
  • Focus on AI: WPP has focused heavily on AI and is rapidly expanding its AI capabilities. This allows them to provide the best services to their customers.
  • Performance in 2023: While the company has met its guidance for organic growth in revenue, the company has been affected by some regional slowdowns and the impact of unfavorable foreign currency.
  • They are still predicting strong growth for the year with organic revenue growth in the range of 4-5% for 2024.
  • Financial Outlook: WPP’s outlook for 2024 shows confidence in improving financials and they are trying to increase ROIC by cutting back spending and improving productivity and margins.
  • However, this forecast depends heavily on the overall economic outlook and client spending behavior, which is uncertain.