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Where next for WPP share price as economic outlook deteriorates?

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WPP’s (LON: WPP) 33% year-to-date share price decline is somewhat unsurprising. The advertising and branding firm is highly dependent on the world economy’s outlook, which has materially worsened over recent months as war in Ukraine, high inflation and increasingly hawkish central bank policies prompt less sanguine economic prospects.

Indeed, the IMF recently downgraded its global economic outlook. It now expects the halcyon days of 2021, when the world economy grew by 6.1%, to come to an abrupt end. Global GDP growth is forecast to slump to 3.2% this year and just 2.9% next year. With China’s zero-Covid policy prompting lockdowns while the US and Europe fight persistently high inflation, the near-term outlook for WPP’s financial performance and share price is relatively uncertain.

Solid financial performance

Of course, the firm’s recent half-year results highlight its long-term potential in a fast-growing global economy. The business reported an 8.7% increase in like-for-like sales and a 12% rise in headline pre-tax profit as companies across a variety of sectors responded to a buoyant global economy by increasing their advertising and branding spend.

Meanwhile, WPP continued its transformation programme that is seeking to reduce annual costs by GBP600m by 2025. It is currently on track to achieve half of this goal by the end of the year. It is also continuing to improve its market position through acquisitions, with several ecommerce and technology-focused firms purchased in the first half of the year. Further M&A opportunities are likely to present themselves in the coming months as tough operating conditions faced by smaller, weaker sector peers make valuations more tempting for their larger rivals.

The company’s net debt position increased by GBP2.3bn in the first six months of the year so that it now stands at around GBP5.3bn. However, this was partly due to the firm’s share buyback programme, which seems to be a logical pursuit given its falling stock price. With net interest cover of over five, WPP’s financial position remains relatively sound.

Investment potential

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In the short run, the WPP share price could come under further pressure. After all, the near-term prospects for the world economy are extremely uncertain and a tighter monetary policy is unlikely to be conducive to more upbeat trading conditions for the firm.

However, its share price now includes a wide margin of safety following its aforementioned decline. It currently trades on a forward price-to-earnings ratio of around 8x. This suggests that investors have at least partly factored in potential difficulties for the firm as a weaker global growth rate leads to a likely moderation in advertising, branding and ecommerce spend.

With the company having a sound financial position, a diverse business model and plans to cut costs, it is well placed to deliver a long-term recovery. It may even be able to improve its market position via acquisition and by virtue of having greater size, scale and financial strength than its peers. Therefore, it offers investment potential over the coming years but could prove to be a volatile holding over a shorter period.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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