WPP - HYP candidate evaluation

[EssDeeAitch]

I am thinking of adding WPP to my HYP portfolio and am having a look at the financials but need some help here. I only have data going back 5 years which is a little bit short I suppose but anyway.

My question is, with the financial data available and seemingly good performance, why has the share price gone down 20% since 2013 and why did it rise in 2015 only to fall by 27% since then? I am clearly missing a lot in the analysis and it may well be the anecdotal stuff. The data I have been able to get is shown below.

Any comments would yet again, be appreciated

Yield - 5.8%
PE - 7

All values shown are for the period 2013 to 2017 inclusive

Revenue growth - 38%
EBITDA growth - 43% (stagnant in 2015/15)
EPS growth - 98%
DPS growth - 75%
Adjusted Profit After Tax - 89%
Return on Invested Capital growth - 32% (constant growth)
ROI growth - 48% (constant growth)
ROA growth- 42% (constant growth)
Financial Leverage growth - 7% (3.55 in 2017, with a peak of 3.76 in 2015)

[moorfield]

FTSE 100 - tick
High Yield - tick
5 years increasing dividend - tick

Have I missed anything "pyadic" ?

[vrdiver]

FTSE 100 - tick
High Yield - tick
5 years increasing dividend - tick

Have I missed anything "pyadic" ?

Context is everything.

The increasing yield has been boosted by increases in the payout ratio - which have now stopped (you can get the background from the annual reports).

The company founder and CEO was recently forced out after a bit of a PR blooper - so some uncertainty and depressed share price.
Fears that companies like Google will eat WPP's lunch - depressing the price.

I hold WPP and will continue to do so, but I suspect (as in, I am making a wild guess) that historic performance may not be a great guide to future performance for the next couple of years...

On the plus side, they are a large company and may just know what they are doing, so who knows how they will perform, come the LTBH viewpoint...

VRD

[idpickering]

FTSE 100 - tick
High Yield - tick
5 years increasing dividend - tick

Have I missed anything "pyadic" ?

Context is everything.

The increasing yield has been boosted by increases in the payout ratio - which have now stopped (you can get the background from the annual reports).

The company founder and CEO was recently forced out after a bit of a PR blooper - so some uncertainty and depressed share price.
Fears that companies like Google will eat WPP's lunch - depressing the price.

I hold WPP and will continue to do so, but I suspect (as in, I am making a wild guess) that historic performance may not be a great guide to future performance for the next couple of years...

On the plus side, they are a large company and may just know what they are doing, so who knows how they will perform, come the LTBH viewpoint...

VRD

I hold WPP, for all the reasons so eloquently put by vrdiver.

Ian.

[EssDeeAitch]

Thanks all, I can see that it is a definite candidate for HYP and will likely add it after the 3rd quarter results are published next week.

But what perplexes me is why has the share price declined despite the seemingly healthy financials? Perhaps this post would better suited to to Company Analysis thread?

[Gengulphus]

My question is, with the financial data available and seemingly good performance, why has the share price gone down 20% since 2013 and why did it rise in 2015 only to fall by 27% since then?

What you're missing is basically "That's how markets work". Look at a long-term price chart of just about any HYP share, even very successful ones with excellent records of delivering steadily-rising dividends, and you'll find a fair number of similar-sized rises and falls. And the same goes for most other ordinary shares as well.

There are some reasons why the company is out of favour, such as the 'PR blooper' vrdiver mentions. Such things strike most (if not all!) companies from time to time, and they may well trigger the rises and falls. And peer influence and confirmation bias among analysts and investors probably contribute as well: it's hard to avoid being influenced by the crowd, and once one is influenced, one tends to believe things that suggest they're right and not believe things that suggest they're wrong. For instance, during about the second half of 2014 and the whole of 2015, BHP Billiton, Rio Tinto and other miners were falling rapidly. There were good reasons for that fall, as commodity prices were falling in a pretty major way, but the TMF HYP Practical board had loads of posts at the time from people finding reasons to sell or avoid topping up the shares - things such as miners being 'cyclical', that the 'commodities supercycle' had turned, that miners were doomed to struggle for a generation (or indeed would never fare well again), etc. Anyone who was influenced that way in the second half of 2015 should be kicking themselves now, because then was one of the best buying opportunities for miners that I've seen!

And by the way, if anyone thinks that's being wise after the event, yes, that's largely true. I did top up my holdings of BHP Billiton and Rio Tinto in the second half of 2015, but only by a bit and only very early in that period, and so I missed the best buying opportunities. And at least part of the reason for that was that there were plenty of plausible-sounding reasons around for not buying - could they really all be wrong? And actually, they weren't all wrong: the companies did actually cut their dividends, pretty seriously in BHP Billiton's case. But the prevailing climate of opinion was seriously over-pessimistic, essentially exaggerating just how serious the problems in the industry were by ignoring the fact that the it has a pretty standard way of dealing with commodity price drops, essentially battening down the hatches until the storm has passed.

Anyway, the point is that when looking at share price falls, one shouldn't expect to always find the reasons in the company's financial performance. Sometimes they'll be there, and it's worth looking for them, but don't expect to always find them there - sometimes they'll be in non-financial issues, and both financial and non-financial causes can be over-reacted to as a result of the way investors and analysts think.

Gengulphus

[monabri]

Wasn't there some hype about a possible takeover by Accenture which might have bulled up the price ?

[bluedonkey]

Part of the reason for the negative share price movement is that you are looking at historical financials whereas the market makes an estimate of future prospects. It is because many of us doubt the ability of any market to accurately predict the future that we pick up shares when the price has fallen/yield has risen.

That said, sometimes the market is right!

[EssDeeAitch]

My question is, with the financial data available and seemingly good performance, why has the share price gone down 20% since 2013 and why did it rise in 2015 only to fall by 27% since then?

What you're missing is basically "That's how markets work". Look at a long-term price chart of just about any HYP share, even very successful ones with excellent records of delivering steadily-rising dividends, and you'll find a fair number of similar-sized rises and falls. And the same goes for most other ordinary shares as well.

Gengulphus

Thanks for this. It seems that the market knows everything and the market knows nothing (not surprising when one considers the number of opinion makers).

Two things jump out at me 1) no-one has suggested that WPP are not a good candidate for a HYP portfolio and 2) no-one has said that the basic financials on WPP are problematic in themselves. I shall do some comparisons with ITV as the other media sector candidate and jump in one way or the other next week.

SDH

[idpickering]

Thanks for this. It seems that the market knows everything and the market knows nothing (not surprising when one considers the number of opinion makers).

Two things jump out at me 1) no-one has suggested that WPP are not a good candidate for a HYP portfolio and 2) no-one has said that the basic financials on WPP are problematic in themselves. I shall do some comparisons with ITV as the other media sector candidate and jump in one way or the other next week.

SDH

As is my want, to hold two shares in any given sector if possible, I hold both ITV and WPP. Could that be an option for you?

Ian.

[EssDeeAitch]

As is my want, to hold two shares in any given sector if possible, I hold both ITV and WPP. Could that be an option for you?

Ian.

Hi Ian, not at this stage, with only seven sectors in my HYP I will rather be increasing coverage before doubling up.

SDH

Moderator Message:
Edited to correct quote formatting. Raptor.

[idpickering]

As is my want, to hold two shares in any given sector if possible, I hold both ITV and WPP. Could that be an option for you?

Ian.

Hi Ian, not at this stage, with only seven sectors in my HYP I will rather be increasing coverage before doubling up.

SDH

Moderator Message:
Edited to correct quote formatting. Raptor.

That's very wise at this stage of your HYP construction. Good luck, and I look forward to seeing how you're getting on in the future.

Ian.

[YeeWo]

- FWIW I took a loss on the chin, which I’m usually very reluctant indeed to do, and sold out of WPP earlier this year at a price higher than today.
- Yield may be an attraction of holding the business, my reservation is the degree of disintermediation FAANGs are creating which is inducing MNCs to purchase directly their marketing bypassing WPP.
- Coupled to the departure of Sir Martin Sorrell, the decline of the SP, the consequent lack of understanding of where WPP is likely to be in 5+ years and I decided this wasn’t for me.
Good Luck to those that hold nonetheless........

[idpickering]

We'll find out more about how things are going with WPP on Thursday, when they release their trading announcement.

Ian.

[Arborbridge]

WPP fails the most basic test of a sound balance sheet: huge negative NTAV.

I don’t want to teach anyone to suck eggs here, but WPP has effectively no asset-backing for the share price, it is a cattle built in the air: look here:

https://www.londonstockexchange.com/exc ... 9JEGBXSET1

See the huge intangibles line? 14.971 billion of nothing?

That’s what happens when you expand by repeated acquisition.

Cross that line out and do the maths. That line only exists if you think WPPs intangibles actually have value. The market is now telling you it thinks not.

I hold but WPP is far more risky than many shares. It is a balance sheet that reminds me of Carrilion with the intangibles dominating. I am gambling that the next CEO can keep the wheels on the bus long enough for me to trade out profitably. Gambling, really. A coin toss. Is that what Doris wants?

"That line only exists if you think WPPs intangibles actually have value. The market is now telling you it thinks not."

I'm not convinced the market is telling me that: otherwise the yield would be much higher than 5.8%. I'm not saying you are wrong about the maths, but if the market agreed or had realised WPP was near "doomed" the yield would be way up above 6%. And shorters: under 2% at present - aren't they supposed to be smart?

On balance, I'd say the market is sanquine about the prospects although, as we've seen before, the market can change overnight.

Arb.

[Walrus]

WPP fails the most basic test of a sound balance sheet: huge negative NTAV.

I don’t want to teach anyone to suck eggs here, but WPP has effectively no asset-backing for the share price, it is a cattle built in the air: look here:

https://www.londonstockexchange.com/exc ... 9JEGBXSET1

See the huge intangibles line? 14.971 billion of nothing?

That’s what happens when you expand by repeated acquisition.

Cross that line out and do the maths. That line only exists if you think WPPs intangibles actually have value. The market is now telling you it thinks not.

I hold but WPP is far more risky than many shares. It is a balance sheet that reminds me of Carrilion with the intangibles dominating. I am gambling that the next CEO can keep the wheels on the bus long enough for me to trade out profitably. Gambling, really. A coin toss. Is that what Doris wants?

I'm not sure I'd call it a coin toss, but I agree there look to be better HYP investments. I know notjing about the mechsnics of advertising and hence his is not something I would want to buy and hold and forget about. That being said with some positive results it could rerate.

[Arborbridge]

Is that what Doris wants?

Probably not, but you've touched on an interesting point - Doris might have owned this from year's ago. Then what would she do now?

She wouldn't even have known or cared that Martin Sorrell had left, nor about intangibles or any of the market news.


Arb.

[jackdaww]

Is that what Doris wants?

Probably not, but you've touched on an interesting point - Doris might have owned this from year's ago. Then what would she do now?

She wouldn't even have known or cared that Martin Sorrell had left, nor about intangibles or any of the market news.


Arb.

===============

doris was already extremely wealthy , which maybe why she had no interest in any detail.

[EssDeeAitch]

WPP fails the most basic test of a sound balance sheet: huge negative NTAV.

I don’t want to teach anyone to suck eggs here, but WPP has effectively no asset-backing for the share price, it is a cattle built in the air: look here:

https://www.londonstockexchange.com/exc ... 9JEGBXSET1

See the huge intangibles line? 14.971 billion of nothing?

That’s what happens when you expand by repeated acquisition.

Cross that line out and do the maths. That line only exists if you think WPPs intangibles actually have value. The market is now telling you it thinks not.

I hold but WPP is far more risky than many shares. It is a balance sheet that reminds me of Carrilion with the intangibles dominating. I am gambling that the next CEO can keep the wheels on the bus long enough for me to trade out profitably. Gambling, really. A coin toss. Is that what Doris wants?

You raise a very serious point and one that I had missed and it seems, others who responded to my OP, or, they did not consider this to be a problem. Well, the stock has been added to my HYP so no use crying over spilt milk now, if any has indeed been spilt. But thanks for the note as intangibles is something else to add to the screening process.

[Bouleversee]

EssDeeAitch

AP889 wrote:

"I don’t want to teach anyone to suck eggs here, but WPP has effectively no asset-backing for the share price, it is a cattle built in the air: look here:"

Has that left you on the horns of a dilemma?