WPP expectations are too low, Deutsche Bank says

WPP only needs to perform in line with its guidance for weak growth in 2019 to boost its shares, Deutsche Bank said on Monday.

"We think that expectations for WPP are now so low that even delivery of current guidance will be enough for the shares to enjoy a re-rating," the German bank said in a note to clients on Monday, though it is not forecasting a return to meaningful growth any time soon.

Deutsche analysts upgraded to 'buy' with an unchanged target price of 1,010p, saying the structural concerns about the advertising the industry are "lifting".

"At a certain point we think the question becomes: what is the right price to pay for the world's largest marketing services company? Despite all of the operational and management issues of the recent past, WPP continues to generate £1.1bn of annual equity free cash flow, which we think is not reflected in its £10bn market capitalisation."

While cynics will say that estimates are simply wrong, given the structural and cyclical environment, the analysts think that, unless there is a major macro shock, estimates "have bottomed" and "all that the shares need" is for results to meet expectations to show the business is stabilising.

New boss Mark Read has set low expectations, they feel, with the shares trading on a multi-year discount in terms of p/e and a 7% dividend yield, covered by both earnings and cash, to suggest downside risk is limited.

Deutsche acknowledged there were not many signs that FMCG companies are increasing their marketing spend with agencies, but saw "hopeful indicators" that the cuts in recent years have bottomed out, with structural concerns over the industry "contradicted by the continued growth of the media agencies", with "little discernable effect" of the incursions by consulting firms or a shift to in-housing of marketing services.

"Ultimately, marketing firms are people-based businesses and the staff who work in one agency-holding company are not markedly different from those employed at another, although their organisational structure may differ," the analysts said, noting that WPP is being valued by the market at $150,000 per employee, roughly 50-70% lower than Interpublic and Omnicom.