Pivotal Research's Wieser: WPP has a 'sound approach for the future'

The firm recommends a buy rating for WPP stock.

Mark Read
Mark Read

NEW YORK: Pivotal Research maintained its buy rating for WPP’s stock on Tuesday, after the holding company’s newly minted CEO Mark Read announced his plan to return it to growth.

Pivotal Research’s senior analyst Brian Wieser said in a note to investors that WPP’s plan is a "sound approach for the future," leaving Pivotal’s assessment "essentially unchanged."

WPP, the world’s largest advertising company, is cutting 3,500 jobs, representing about 2.6% of its global workforce, shutting down 80 offices, and merging 100 others.

Wieser said in his note that the "detailed descriptions of the ways in which agencies offer services beyond creative and media towards technology and e-commerce-related services" are "useful illustrations" of how agencies are "evolving."

"Overall, we view WPP’s strategy as sound and see its financial goals as realistic, if likely (and appropriately) conservative, as the company has ‘deliberately avoided heroic forecasts,’" Wieser concluded.

However, Wieser noted that clients may demand more transparency around agency fee structures and limit arrangements with undisclosed or under-appreciated forms of compensation, which could hurt long-term growth.

Client losses and operational inefficiency also pose a threat to WPP’s revenue and margin expectations. Earlier this year, WPP lost accounts for Ford, HSBC, and American Express.

At the same time, clients are squeezing holding companies for operational efficiency, with agencies proving resilient to finding cost-saving opportunities to perform like-for-like services.

"However at some point such efforts may no longer yield incremental benefits, and as long as agencies operate in a competitive manner they will suffer," Wieser said. "In a similar light, high margin services offered today are typically likely to become standard-margin services in the future, as the more a service becomes standardized, the more that marketer’s procurement teams seek to standardize processes and drive agency margin out of the activity."

Wieser raised the specter of certain marketing disciplines facing greater competition from consulting and IT services firms, such as Accenture and IBM, which are building platforms that "can manage the execution of media campaigns, monitor the impact of those campaigns, and integrate those efforts with an array of marketing data within a company’s ERP [enterprise resource planning] system."

Finally, competition drives advertising spend in a given category. If that competitive intensity decreases, so too will marketing services, Wieser said.

WPP’s stock has taken a beating in the markets after a couple of stagnant quarters.

Over the summer, longtime CEO and founder Sir Martin Sorrell resigned from his position in response to allegations he’d misused company resources and visited a brothel. Shortly after, Sorrell launched his own holding company to compete against WPP, S4 Capital, which is traded on the London Stock Exchange.

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