Britain's WPP Group (NASDAQ:WPPGY), the world's third-largest advertising group, recently reported 2003 revenue excluding acquisitions and currency effects up a mere 1%. Total revenue jumped a more respectable 7.3%, however, and diluted earnings per share, before goodwill amortization and other charges, increased a downright impressive 16.9%. WPP sees business improving and its attention to profitability taking hold.
Advertising is a strong indicator of economic activity, but WPP's outlook is particularly relevant to television and media outlets like General Electric (NYSE:GE), Disney (NYSE:DIS), Viacom (NYSE:VIA), and News Corp. (NYSE:NWS). The same goes for Internet heavyweights Time Warner (NYSE:TWX) and Yahoo! (NASDAQ:YHOO).
For 2004, WPP expects "balanced growth," with worldwide spending on advertising and marketing set to increase 3% to 4%. That outlook will not necessarily ignite advertising-dependent stocks, but it does bode well for firmer advertising rates and for enhanced profitability for media companies.
On the margin front, WPP expects operating margins to improve by 0.8% (excellent) in 2004 to 13.8%, which puts it within striking range of the industry's high watermark of 16%. The company's long-term goal is 20%. Such candor clearly puts management under pressure to perform. Bravo, WPP!
What inspires such confidence? For one, a strong and building worldwide presence. An increased focus on financial performance, for another. Both should serve shareholders well. With cash on hand approaching the level of total debt, the company has lots of financial flexibility.
At $55 a share, WPP has doubled off its 52-week low, and sits near its 52-week high, though a far cry from its dot-com inspired peak of $105.88. At 37 times diluted earnings, the price reflects a lot of the good news, making it attractive mainly to those who believe in the long-term prospects of worldwide advertising and those who are convinced of the prospects for further margin improvements.
Investors can get a kick out of the quarterly report with its interesting and distinctly British comments. "We are definitely out of the bath..." and "We would not want to take a shower in 2005" leave much to the imagination. Hopefully, they are not to be taken literally.
Talk about WPP Group with other investors in its very own discussion board.
Fool contributor W.D. Crotty owns stock in Disney and News Corp.
