Credit Suisse cuts WPP target price, keeps at Outperform

Analysts at Credit Suisse lowered their target price on WPP's shares following revised guidance from the advertising giant.

On 3 March, WPP guided towards organic revenue growth of about 2% for 2017, less than the 3% consensus had penciled in.

In the opinion of the broker's analysts, in hindsight WPP's belated admission that growth would be less than 2016's 3.1% pace was foreseeable after it lost the VW and AT&T accounts, cutting 100 basis points from its forecast rate of sales growth.

The main drivers of WPP's downgraded guidance were revised budgets in February 2017, as well as instances of underlying softness in some businesses and regions like the UK.

WPP also admitted increased competition between ad agencies was hurting pricing power.

The failed bid for Unilever and increased pressures on fast-moving-consumer-goods companies to cut costs might also entail "downside risk" to the the company's 2.0% target, said analysts Matthew Walker, Joseph Barnet-Lamb, Sophie Bell and Stephanie MacAulay in a research report sent to clients.

Nonetheless, there was no evidence of structural damage thus far they said, pointing to forecasts from rivals such as Omnicom and IPG for organic growth of about 3.5% in 2017. Indeed, Dentsu expected growth of between 3% and 5%.

"Almost all agencies are looking for 30-50bps of margin expansion despite transparency pressure in US media buying. In most pitches agencies are not coming up against the consultancies. Evidence for recent dis-intermediation by Apple and Google is slight," the analysts added.

A potential investigation into media by the US Department of Justice, pressures on gross domestic product and account losses were among the chief risks to watch out for, the analysts said.

Credit Suisse reiterated its 'Outperform' recommendation but lowered its target price from 2,000p to 1,920p.

Analysts at JPMorgan on the other hand were more constructive on the shares, highlighting how they were trading at a 2017 price-to-earnings multiple of 13.8 and an equity free cash flow yield of 7.6%, which the found "attractive".

Furthermore, a rate of sales growth in excess of 10% (2% from organic, 5% from FX and 3% from M&A) and a 13% rise in earnings per share in 2017 should limit further downside, they believed.

JP Morgan stuck by its 'Overweight' recommendation but reduced its target price from 2,102p to 1,997.0p.