WPP Q3 – still on track to beat FY13 guidance, albeit discounted by markets and valuation

WPP’s Q3 revenue numbers today were solid, but with few real surprises. Year on year organic revenue growth of +5.0% maintained the similar rate already reported for July while also being slightly ahead of rivals Omnicom and Publicis.  Scanning the numbers being reported there are four main points that stand out.

1) UK organic revenue growth of +8% compared with +7% for both OMC & Pub and the +7% advertising growth also recently reported by Sky in the quarter.  Before you get too carried away about a UK economic recovery, this mainly reflects the phasing benefit of a weak comparative period last year over the Olympics. UK disposable income growth remains below inflation, energy prices are set to rise another +8% and the outlook for consumption remains bleak even assuming interest rates can be held in check.

2) WPP’s organic revenue growth from the BRIC countries all came in at between +5-10%.  This is considerably better than for its rivals and is particularly important for WPP which is the dominant media buyer in India and is leader in China.

3) WPP re-iterated its FY13 margin guidance for a 50bps YoY increase. With average staff numbers broadly flat on an underlying revenue increase that should be heading for +3.5-4.0%, this still looks overly conservative (WYT estimate +80 bps).  This is not Sir Martins first time round the block and notwithstanding his upbeat economic outlook into 2014, he will be aware that his clients may struggle to make their Q4 earnings numbers which could lead to them cutting some discretionary marketing budgets. These year end shortfalls in marginal revenues can be a real pain for agencies own margins, so a smart CEO will carry some extra margin cushion into the Q4, just in  case. In current uncertain markets this is probably very wise!

4) Net new business of $7,896m for the 9 months means a whopping $3,715m was won in Q3;  a +163% YoY increase (x4 for creative and >x2 for media).  What is even more interesting about this spectacular performance however is WPP’s inability to account for most of this.  While there is always a sizeable gap between the overall new business number that is reported and the individual accounts identified, this gap is now massive. In its Q3 presentation, 7 wins were identified which totalled only $894m and 1 loss of $50m; a net figure of only $794m and leaving another $2,921m unaccounted for.  Even by agency standards, this must be some sort of record.  Did they win the NSA account, but can’t reveal it?

The shares. It’s big, it’s geographically diversified, the shares are liquid and it is still delivering slightly ahead of forecasts, albeit the market must surely already be baking this into real expectations. As such, the shares have continued to act an attractive haven for money scared into equities by the prospect of QE infinity.  In these circumstances, investors are being faced with a choice to find returns. Either move up the risk curve or extend your valuation horizon. While neither are particularly palatable and both of course carry risk, the latter is less overt and may seem more digestible. We saw this rather spectacularly recently with the pop in the Google share price as markets played catch-up.  For WPP meanwhile, its has been more of a seemingly inexorable grind upwards with the shares now having to reach out a further 18 months on current forecasts (both WPP and market) to support the present valuation and growth.