While Sorrell's departure may hurt WPP's relationship with clients in the short term, we think such an impact will be minimal given that Sorrell has not been as instrumental in winning new businesses as he was years ago.
In our view, the firm’s narrow moat rating remains intact as WPP’s brand equity and the strong reputations of its ad agencies are based on the quality of services the firm continues to provide for its clients. This news does not alter our expectations of no organic growth for this year, which we think will be followed by 1% growth in 2019. We are maintaining our £15 fair value estimate for this best idea name.
Departure of Sorrell will likely push WPP shares lower in the short term. However, we remain bullish on the stock for a few reasons. First, we continue to rate WPP with a narrow moat as its brand equity and the strong reputations of its ad agencies are based on the quality of services and not necessarily Sorrell’s leadership.
Second, while no additional detail was provided by the firm, Sorrell's resignation is likely a decision he thinks is best for WPP shareholders, in our view. We note that he still has a 2% stake in the firm.
Third, while Sorrell's departure may hurt WPP's relationship with clients in the short term, we think such an impact will be minimal as he has not been as instrumental in winning new businesses as he was years ago. We look for the firm to show signs of stability to its clients by replacing Sorrell quickly. WPP’s board has appointed Mark Read and Andrew Scott as the firm’s co-COOs, which we think indicates some steadiness for WPP as both are WPP veterans and have worked closely with Sorrell in the past.
Read is currently the CEO of WPP’s Wunderman and Scott is overseeing WPP’s operations in Europe. Under the leadership of Read and Scott, we expect WPP’s restructuring efforts, which were a result of clients demanding more transparency and better prices, to continue. We think the restructuring will help the firm operate more efficiently, possibly resulting in some operating leverage.
Last, with new leadership, the firm may implement some of turnaround strategies a bit more quickly. They include possible sales of some of its assets such as the custom research side of the Data Investment Management business and more aggressive integration of creativity and media agencies.