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Neutral Rating Reiterated on WPPGY

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Dublin, Ireland-based advertising titan, WPP Group Plc. was again rated Neutral by us, anticipating the company to perform in line with the market.
This $16.9 billion company over time has strengthened its foothold in fast growing emerging markets through acquisitions or investments in businesses across the world; all aimed at enabling access to vast untapped markets in those regions.

Strategic business acquisitions in 2011 amounted to 24 in new markets, 32 in new media and 8 in consumer insight. In the first half of 2012, roughly 20 acquisitions in new markets, 13 in consumer insight and 7 in other areas were carried out. These acquisitions represent a major competitive advantage for the company and enhance its creative reputation and co-operation among the Group companies.

First half of 2012 was impressive for WPPGY with EPADR of $2.03 in the period, up from $1.84 compared with the previous year period. Revenue grew 5.5% or 6.8% on a constant currency basis on the back of healthy performances across all geographical regions and communication service sectors. Billings in the period were strong and grew 1.2%.

For the full year 2012, management expects revenue growth, excluding the impact of acquisitions and currency fluctuations, to be roughly 3.5%. Operating margins are expected to improve by 50 basis points. Over the longer term, management expects above-industry average revenue growth, 0.3 to 0.6 points annual improvement in staff cost/revenue ratio and 0.5 margin points or more improvement in operating margin. PBIT is expected to improve by 10%-15% p.a. on the back of margin growth and benefits from small and medium-sized acquisitions.

However, a competitive and fragmented advertising/communication industry with risks of losing market share and foreign exchange fluctuations ever lurking in the scenario is a matter of constant worry for the company. Also, the company’s international operations expose it to the risks of local legislation and unstable political conditions. Furthermore, excessive dependence on a few large clients also makes the company more vulnerable to loss of business.

The current Zacks Consensus EPS Estimates for WPP plc are $5.57 and $6.06 for years 2012 and 2013, respectively. The estimates represent a year-over-year growth of 3.53% for 2012 and 8.82% for 2013.

The stock also bears a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating while its major competitors Interpublic Group of Companies Inc. (IPG - Free Report) and Omnicom Group Inc. (OMC - Free Report) also carry a Zacks #3 (Hold) Rank.

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