LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So should I buy WPP (WPP +1.28%)?
Ad men
If you want to know how to get ahead in advertising, ask WPP. It's one of the world's largest advertising and marketing groups, an established presence in both developed and emerging markets, notably China. It owns several agencies, including Ogilvy & Mather, and boasts a raft of big-name clients including American Express, Colgate-Palmolive, GlaxosmithKline, HSBC, McDonald's, Microsoft, Nestle, Unilever, and Vodafone. Impressive. So should I buy it?
Ugly beautiful
The market likes this stock, and with good reason. WPP has enjoyed a relentless run of share-price growth, up 85% over five years, 67% over three years, and 30% over 12 months. Its recently published full-year results beat expectations to deliver a 7% rise in profits before tax to 1.3 billion pounds. 2012 revenues rose 2.9% to 10.37 billion pounds, the second successive year revenues have topped 10 billion pounds. WPP may look like a rare beauty, with operating margins hitting a record high of 14.8%, but it got there the ugly way, admits CEO Martin Sorrell. Although it posted 4% growth, difficult market conditions sparked a 1% drop in like-for-like revenues.
As football managers say, there's an art to winning ugly. WPP has shown it has the resilience to what Sorrell calls the four "grey swans" of global uncertainty: Europe, the Middle East, China, and the U.S. Strong global diversification helps, with a powerful performance across Asia-Pacific, Latin America, the Middle East, and Africa offsetting weakness in the U.S. and Europe. 2013 looks like another tough year, with the U.S. a particular worry, although WPP expects the 2014 World Cup in Brazil to lift everybody's spirits. Its forward-looking digital strategy should also reap rewards, as more companies switch their efforts online.
Reaping dividends
After a few days to digest the results, brokers came out in favour of WPP, which currently trades at 10.76 pounds. Last week, JP Morgan lifted its target price from 10.54 pounds to 12.82 pounds and maintained its overweight rating. Goldman Sachs has hiked its target price from 11.05 pounds to 11.55 pounds, while Investec lifted its target price by 25 pence to 11.75 pounds. Both rate WPP a buy. If you like this stock, you're in good company. WPP isn't the biggest-yielding stock on the FTSE 100 at just 2.6% a year, but management is pursuing a progressive dividend policy and has just hiked its payout by a mighty 16%. Since the dividend is covered 2.7 times, there should be scope for future growth. The yield is forecast to rise to 3.4% by Dec. 2014.
These are tricky conditions for advertising and marketing companies, and projected earnings-per-share (EPS) growth of 3% in 2013 reflect that, but that should rise to 10% in 2014. WPP isn't cheap, trading at 14 times earnings and on a PEG ratio of 1.5, but that's hardly surprising, given its share-price surge and strong balance sheet. You could wait to see if one of those grey swans delivers a better buying opportunity. But WPP has mastered the art of winning ugly, and I would expect it to keep winning when the global economy is sitting pretty again.
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