Shares in WPP plc (LON:WPP) fell today after its target price was cut by JP Morgan Cazenove and HSBC following last week’s warning that tepid economic growth could hurt revenues.
The advertising giant last week said it expects 2% growth in net sales in 2017 compared with about 3% last year, citing risks to economic growth and the loss of two big accounts, including Volkswagen and AT&T, at the end of last year.
Risks to the economy include political uncertainties in the US, where new President Donald Trump is still to implement policies promised, and in Europe, where elections are being held. The impact of the UK’s exit from the European Union is also unclear.
JP Morgan cut its target price to 1,997p from 2,102p but reiterated an ‘overweight’ rating on the stock.
“Recent major account losses (i.e. AT&T and Volkswagen) will be absorbing almost 100 basis points of organic growth in 2017 and fast-moving consumer goods players are also reducing their ad spend which clearly limits short-term earnings upside risk from here,” the broker said.
“However, after expectations have been reset on Friday, the shares are trading on 13.8x 2017 price-earnings ratio and 7.6% equity free cash flow yield which we find attractive: WPP should deliver 10% revenue growth (+2%/+5%/+3% for organisation/foreign exchange/mergers and acquisitions) and 13% earnings per share growth this year, limiting further downside we believe.”
JP Morgan also noted that WPP chief executive Sir Martin Sorrell has reiterated the company’s goal for a 30 basis point margin increase in 2017 and a long term margin target of 19.7%.
HSBC lowered its target price to 2,000p from 2,180p and maintained its rating at ‘buy’.
“All in all, leaving apart contract losses (to be spread over two years), we do not see anything specific to WPP, just the confirmation that market growth is structurally capped at low single digits (Havas guided on a market in the 2-3% growth bracket), that has nothing really new.”
The bank added that it sees WPP as a solid player offering a decent outlook in terms of key performance indicator improvements.
Shares fell 1.88% to 1,726p in morning trading.