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Analyst Blog

On Nov, 11, we maintained our Neutral recommendation on WPP plc (WPPGY - Analyst Report). While the advertising company’s long-term fundamentals appear solid, we remain sidelined due to its soft top-line performance in the recent quarters.

Moreover, 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 Oct 23, WPP reported revenue growth of 7.4% year over year to £2,680 million ($4,152.4 million) for third quarter ended Sep 30, 2013. However, it missed the Zacks Consensus Estimate of $4,338 million.

Nevertheless, the company won net new business of $3.716 billion during the third quarter of 2013, compared with $1.415 billion in the prior-year quarter.

The company reported decent revenue growth in three of its four reporting segment namely - Branding and Identity, Healthcare and Specialist Communications, Advertising and Media Investment Management. However, revenues from the Public Relations & Public Affairs segment rose marginally.

Moreover, acquisitions have been the company’s primary tool for strengthening its foothold in new and emerging markets.  During the first nine months of 2013, WPP completed 45 acquisitions. These strategic acquisitions give the company a major competitive edge and enhance its creative reputation and co-operation among the Group companies.

However, WPP’s dependence on a limited number of big clients for a significant portion of its revenues is a cause for concern. Loss of any of these clients could adversely impact its prospects, business, financial condition and operational results. Moreover, the company’s international operations are exposed to economic uncertainties and risks from local legislation and unstable political conditions.

Other Stocks to Look For

Currently, WPP holds a Zacks Rank #2 (Buy).

Some other stocks that are performing well in the advertising industry and carry the same Zacks Rank include Marin Software Inc. (MRIN - Snapshot Report) and Publicis Groupe SA (PUBGY). Another peer in the Business Services sector, ABM Industries Inc. (ABM - Analyst Report) holding a Zacks Rank #2 (Buy), can also be considered.

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