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On Sep 4, we maintained our Neutral recommendation on advertising and marketing services major WPP plc (WPPGY - Analyst Report).

The company has been maintaining its dominant market position over time and is expected to sustain the same going forward. Moreover, WPP’s strategic acquisitions and cost reduction initiatives in the backdrop of an improved demand is likely to ensure future growth. However, concentration risks, foreign currency exposure, and stiff competition from other players in the market could undermine its profitability to some extent.

Why the Reiteration?

On Aug 29, WPP reported flat first-half fiscal 2013 earnings of £280.9 million ($433.7 million) or £0.215 per share ($0.33 per ADS) compared with £277.8 million ($428.9 million) or £0.216 per share ($0.33 per ADS) in the first half of 2012.

Revenues increased 7.1% year over year to £5,326.7 million ($8,224.9 million). The rise was driven by 2.4% organic growth, 3.1% inorganic growth and 1.6% gains due to the effects of currency exchange rates. On a geographic basis, revenues in North America climbed 5.3% year over year to £1,840 billion ($2.841.1 million). Moreover, In the Asia Pacific, Latin America, Africa, the Middle East as well as Central and Eastern Europe, revenues rose 7.9% year over year to £1,560 million ($2,408.8 million). Additionally, Western Europe delivered healthy performance as well.

Moreover, the company reported strong billings that increased 5% year over year to £22.7 billion ($35.1 billion).

Following the release of second-quarter results, the Zacks Consensus Estimate for fiscal 2013 increased to $6.33 per share from $6.31. Moreover, the Zacks Consensus Estimate for fiscal 2014 rose to $7.03 per share from $7.00.

Acquisitions have been the company’s primary tool to strengthen its foothold in new and emerging markets. It completed 65 acquisitions worldwide across all its business segments in 2012. Moreover, during the first half of 2013, WPP completed 26 acquisitions. Additionally, the primary focus of the company is to grow its revenues and gross margin at a faster rate than the industry average.

However, WPP operates in a highly competitive and fragmented communication services industry and faces the risk of its clients shifting their loyalty to another agency at a relatively short notice, which might lead to loss in market share. Moreover, WPP depends on a limited number of big clients for a significant portion of its revenues, which again poses a threat to its profitability.

Other Stocks to Consider

WPP currently carries a Zacks Rank #2 (Buy). Some other stocks in the industry that are worth a look include Publicis Groupe SA (PUBGY), Information Services Group, Inc. (III - Snapshot Report) and Corporate Executive Board Co. (CEB - Snapshot Report). All these carry a Zacks Rank #2.

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