WPP's share price fell more than one per cent this morning, despite beating expectations on both profit and like-for-likes.
The advertising giant reported headline profit before tax up 12.1 per cent to £596m – ahead of expectations that it would come in around £590m – and up 13.2 per cent on a constant currency basis.
Revenues have also beaten expectations, rising 6.8 per cent to £5.84bn in sterling terms -although it was down 2.6 per cent in dollar terms to $8.9bn. On a constant currency basis, revenues climbed 6.4 per cent, with like-for-likes up 4.9 per cent.
Like-for-likes were expected to be up 2.2 per cent.
Reported billings were up five per cent to £23.2bn, while net sales margins met expectations, rising 0.3 margin points ahead of last year.
WPP's share price opened 1.2 per cent down, but has risen throughout early morning trading.
Why it's interesting
Sir Martin Sorrell's swans are still very much in plain view, with WPP's chief executive warning of “misplaced” optimism.
“To survive in the advertising and marketing services sector, you have to remain positive, indeed optimistic, seeing the glass half-full and industry and company reports generally continue, understandably, to reflect that attitude,” WPP's outlook said. “However, general client behaviour does not reflect that state of mind as tepid GDP growth, low or no inflation and consequent lack of pricing power encourage a focus on cutting costs to reach profit targets, rather than revenue growth.”
Sorrell warns that there is little reason to believe that current levels of GDP growth will grow, noting that nominal forecasts have actually deteroriated. Oil price reductions, the Iranian nuclear deal and the international currency wars “have not been helpful black or grey swans”.
Emerging markets aren't growing fast enough and geopolitical issues such as the ongoing conflict in Ukraine and continued tensions in parts of the Middle East and North Africa “remain top of business leaders’ concerns”.
However, given the recent turbulence in China, it's interesting to note that Sorrell is not deterred, saying "concerns about China, aggravated by the recent RMB devaluation and stock market decline, and Brazil remain, although we remain unabashed bulls of both. "
What they said
Sorrell warned specifically of two grey swans.
“First, what impact will the much anticipated Federal Reserve tightening have on bond and equity markets? Although interest rates are likely to remain lower, longer than many anticipate, due to mediocre growth rates, when the tightening comes, as it inevitably will, it may have a dramatic impact on bond and equity valuations, as recent gyrations in the markets indicate. Will the RMB weakness, for example, blow the Federal Reserve Bank off course from a 2015 tightening?
“Secondly, the somewhat surprising result of the United Kingdom General Election (at least to the pollsters), with the Conservatives winning an overall majority, has resulted in an uncertainty-stimulating European Union referendum.
“In addition, the reduction of the still remaining, substantial, United Kingdom budget deficit, is being re-addressed in the context of a new fixed five year political cycle.
So all in all, whilst clients are certainly more confident than they were in September 2008 post-Lehman, with stronger balance sheets (over $7 trillion in net cash and limited leverage), sub-trend long-term global GDP growth at around 3.0-3.5% real and 5.0-5.5% nominal, combined with these levels of geopolitical uncertainty, with low inflation or fears of deflation resulting in limited pricing power, with short-term focused activist investors and strengthened corporate governance scrutiny, make them unwilling to take further risks.
They, therefore, focus on costs, rather than revenue growth.
WPP believes the rest of 2015 will play out much like 2014, with advertising as a proportion of GDP remaining “constant” overall.
“All in all, 2015 looks to be another demanding year, although a weaker UK pound against a stronger US dollar may continue to provide some modest currency tailwind, which may be now more than offset by a stronger pound against the euro and the fast growth market currencies.
“2016, however, may provide a little further lift to the industry, of say one percentage point more of growth, given its maxi-quadrennial status – enlivened by the visually-stunning Rio Olympics and Paralympics, by the less visually-stunning United States Presidential Election and, last but not least, the UEFA Euro 2016 Football Championships.”