WPP's Earnings Improve in 2013

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Advertising and communication services provider WPP plc (WPPGY) reported strong results for the full year 2013 with double-digit earnings and mid single-digit revenue growth year over year. Earnings per share for 2013 improved 10.8% year over year to 69.6 pence ($1.09) on the back of revenue growth across all geographic regions and strong performances from every operating segment except Public Relations and Public Affairs.

Revenues increased 6.2% to £11,019 million ($17,244.7 million) in 2013 with like-for-like growth of 3.5%, inorganic growth of 2.2% and 0.5% from currency translation effects. The company recorded strong revenue growth in the Asia Pacific region, Latin America, Africa and the Middle East, and the United Kingdom.

Reported billings for the year increased 4.1% to £46.2 billion ($72.3 billion) driven by higher demand from new business initiatives.

Revenues by Region

During the year, revenues in North America climbed 5.6% year over year to £3,745 million ($5,860.9 million) on a reported basis. The surge in revenues was led by strong performance from the company’s advertising and media investment management, data investment management, and the healthcare and specialist communications businesses.

Revenues in the U.K. improved 10.9% to £1,414 million ($2,212.9 million), driven by a healthy rise in advertising and media investment management business, public relations and public affairs, as well as direct, digital and interactive businesses.

Revenues in Western Continental Europe increased 6.3% year over year to £2,592 million ($4,056.5 million) with a relatively steady performance in Italy, Germany, the Netherlands and Turkey.

In Asia Pacific, Latin America, Africa, the Middle East and Central and Eastern Europe, revenues rose 5.0% year over year to £3,268 million ($5,114.4 million) on a reported basis, driven largely by robust performances in Latin America, Central and Eastern Europe, Africa and the BRIC (Brazil, Russia, India, China) countries.

Revenues by Segment

By segment, Branding and Identity, Healthcare and Specialist Communications was the strongest performer in 2013 with revenues of £2,970 million ($4,648.1 million), rising 9.1% year over year on a reported basis and 8.4% in constant currency. AKQA, a premier digital agency acquired in Jul 2012, performed particularly well with full year like-for-like revenue growth of over 20%

Revenues from Advertising and Media Investment Management improved 7.2% to £4,579 million ($7,166.1 million) on a reported basis. While Advertising grew well in North America, Asia Pacific and Africa, Media Investment Management was particularly strong across all regions with double-digit growth in North America.

Data Investment Management’s revenues increased 3.6% year over year to £2,549 million ($3,989.2 million). Although there was a marked improvement in 2013, the weakest sub-sector continued to be the custom businesses in mature markets, where discretionary spending remained under review by clients.

Revenues from Public Relations & Public Affairs rose marginally by 0.4% year over year on a reported basis to £921 million ($1,441.4 million) as WPP faced headwinds in North America, Continental Europe, Latin America and the Middle East.

Margins

Operating margin for full year 2013 reached a historical high of 15.1%, while gross margin was up 0.4 margin points to an industry leading 16.5%.

Balance Sheet & Cash Flow

Free cash flow for the twelve months ended Dec 31, 2013, was £1.219 billion ($1.908 billion), of which the company utilized £221 million ($345.9 million) for acquisitions, £197 million ($308.3 million) for share repurchases and £397 million ($621.3 million) for dividends.

Average net debt decreased 7.5% year over year in 2013 to £2.989 billion ($4,677.8 billion), reflecting the continued improvement in working capital in the second half of the year and lesser acquisition spends.

WPP repurchased 17.4 million shares at an average price of £11.31 ($17.7) per share during the year. The company raised its share buyback target to 2%–3% of share capital in 2014 from the existing 1%. Dividend per share of 34.21 pence (53.5 cents) in 2013 was up 20% year over year with a payout ratio of 42% versus 39% in 2012. The targeted dividend payout ratio in 2014 is 45%.

Acquisitions

WPP completed 62 acquisitions worldwide across all spectrum of its business in 2013. Of these, 38 acquisitions and investments were made in new markets, 32 of which were in new media. Moreover, 22 acquisitions were made in data investment management, including data analytics and the application of new technology and 2 acquisitions catering to requirements of individual clients and agencies.

Outlook

With sustained revenue growth in faster growing geographic markets, strategically targeted acquisitions, and continued emphasis on improvement in operating costs to enhance margins, WPP expects to continue its growth momentum in 2014. The company expects above-industry-average revenue growth due to its geographically superior position in new markets and functional strength in new media and data investment management, including data analytics and the application of new technology. WPP expects operating margin improvement of 0.3 margin points in 2014 on a constant currency basis, with earnings increasing 10%–15%. With January like-for-like revenues up 5.7% and gross margin up 4.1%, we see WPP as well poised.

WPP currently carries a Zacks Rank #3 (Hold). Other stocks in the industry that look promising and are worth looking into now include Millennial Media Inc. (MM), holding a Zacks Rank #1 (Strong Buy), and Marin Software Inc. (MRIN) and Publicis Groupe SA  (PUBGY), both holding a Zacks Rank #2 (Buy).

Note: £1 = $1.565 (period average from Jan 1, 2013 to Dec 31, 2013)

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