Solid Growth and Margin Expansion Likely to Continue in 2023 at WPP

WPP WPP closed another strong year, and while the stock has increased 28% year to date, we think it remains the most attractive of the large advertising holding firms, trading at only 0.78 times our GBX 1,340 fair value estimate with a 3.8% dividend yield. While ad spending may slow due to a possible economic downturn in the first half of this year, we think the firm can hit its 2023 organic growth and adjusted margin expansion forecast. Recent account wins, differentiation on the creativity front, investments in technology and data analytics, and a restructuring that has streamlined operations position WPP well to accelerate revenue growth and create operating leverage.

Fourth-quarter net revenue increased 6.4% organically from last year. The large markets in North America and Europe performed well with organic growth of 3.5% in the United States, 12% in the United Kingdom, and 4.9% in Germany. Weakness persisted in China as organic net revenue declined 8.4%; we expect some improvement later this year, given the country’s easing of COVID-19 policies. Demand for media and creativity remained strong, driving the global integrated agencies segment’s 6.6% organic net revenue growth in the fourth quarter. The public relations and specialist agencies segments also experienced organic growth of 6.5% and 4.4%, respectively.

WPP’s net account wins in 2022 represented gross ad spending of nearly $6 billion, which bodes well for growth in 2023. However, while the firm won large accounts such as Verizon and kept Sony PlayStation and Mars Wrigley, it also lost sizable accounts like L’Oreal and Pepsi (likely due to the large global win of Coca-Cola in 2021).