Let’s be honest, 2018 is turning out to be a fairly bad year for equities. Good news in the future appears limited, and if there is anything that markets hate, it’s uncertainty. Perhaps one of the worst performers is WPP, whose shares have declined by a huge margin in the space of a year from almost £18 to today’s level of just over £11. Not only this but the company also recently took the rather unusual step of reporting that it was investigating its own boss in public for as yet unspecified allegations of personal misconduct and/or misuse of company assets.
The share price chart does not make good reading if you are long in this share:
I am indeed long in this share, having taken a position at 1257.50p in February. Looking at this as an entry point, I chose it as there seemed to be some support from the previous year. And for a while, this seemed to be right as the share soared back towards 1500p. At the best I was almost 20% up and in retrospect it would be easy to say that we should have inserted a stop loss.
I believed at the time the company was still fairly cheap; profits were due to decline slightly in 2018, but this is a business that there will always be a demand for with good opportunities worldwide; it also has a progressive dividend policy with a decent yield that is well covered. One fly in the ointment is that debts have been increasing here but relative to profits this is not a big burden. They are also buying back their own shares.
Unfortunately the bad news started to hit. The preliminary results in March showed that profits were flat and projected results for this year would also be so, which led to estimates being written down. The comments from Sir Martin Sorrell did little to help the decline:
“2017 for us was not a pretty year, with flat like-for-like, top-line growth, and operating margins and operating profits also flat, or up marginally.
“The major factors influencing this performance were probably the long-term impact of technological disruption and more the short-term focus of zero-based budgeters, activist investors and private equity than, we believe, the suggested disintermediation of agencies by Google and Facebook or digital competition from consultants.
The last line is what many people have been worried about: whether the nature and size of firms such as Google and Facebook render WPP little more than a middle-man, and one that adds little or no value. There is nothing to stop either of these firms gaining the ability to replicate WPP and offer in-house advertising services for a more seamless experience. Although recent news seems to have put a cork in this for now. The troubles surrounding Cambridge Analytica suggests that a too cozy relationship could potentially lead to abuse of the system, threatening ethics in the process.
From that point of view this could be a major let-off for WPP, particularly if governments introduce new laws against misuse of customer details for marketing purposes. Quite how this would work is unknown, but WPP would stand to gain.
This isn’t as much as an issue as the recent troubles regarding long-term CEO Sorrell. On 4 April, we woke up to the news that the CEO was to be investigated over alleged wrong-doings. The company put out an extremely clipped RNS which consisted of three lines:
The Board of WPP has appointed independent counsel to conduct an investigation in response to an allegation of personal misconduct against Sir Martin Sorrell, Chief Executive Officer of WPP. The investigation is ongoing. The allegations do not involve amounts which are material to WPP.
What is not said is often more material than what is said. Certainly the details about what misconduct there is, is scant and covers a wide range of offences. The last line both adds and takes away clarity, suggesting that money was a reason, but it was not material. But what is not material to a company such as WPP could still be a massive amount. After all, turnover was £15bn last year.
Whatever it is, it is clear that someone knows more details of what is going on. And looking at the market reaction it seems that the offence is question is not too serious. The share price declined around 2% on opening, but has since recovered all of that. At the time of writing the share price is higher than before the news broke.
One thing that cannot be hidden is the choppy waters the company faces in the future. The culture of this firm must be a little different to others. Sir Martin Sorrell built up this firm from almost scratch to one of the biggest in the country and is still the CEO. He is slightly more than a legend in the company and more akin to a God-like figure. So the actions of a company to investigate its own master, and the willingness to air their dirty washing in public point to divisions at the top level.
Perhaps the rather public humiliation was designed to force an issue. Sorrell is 73 now and his usefulness to the business in the coming years would surely be under question, with dissent growing at his remuneration. In the past 2 years this has totalled £110m, mainly due to shares awarded. With no clear succession plans it is difficult to see what kind of direction the future holds. And due to his shareholding, he will most likely be heavily influential even if he is ousted.
At the time of purchase Stockopedia generally liked this share, giving it a rating of 82, although this now stands at 45. I am currently 10% down on this so haven’t been stopped out yet. But the coming months are pivotal – as I see it there is the potential for either the continued slow decline or a sharp increase depending on what the news is.
Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.