FTSE 100

Is WPP’s share price recovery running out of steam?

Does WPP (LON: WPP) have further stock price upside potential?

The share price of WPP (LON: WPP) experienced a strong recovery following the March 2020 stock market crash. Indeed, it returned to its pre-Covid level around six months ago following a severe decline. However, since then, it has failed to offer any material gain. By contrast, the FTSE 100 index is up by around 5% over the past six months.

Clearly, the company faces continued uncertainty due to an increasingly opaque global macro outlook. Factors such as rising inflation (and the prospect of increasing interest rates that could dampen global growth), China’s regulatory changes and political difficulties in the US, including worries about the debt ceiling, mean that the widely anticipated world recovery from the pandemic is in danger of being downgraded.

Furthermore, Covid-19 cases remain at elevated levels. There is a threat that containment measures could return over the coming months. This could affect the global growth outlook and harm WPP’s financial performance due to it being a relatively cyclical company that is reliant on the performance of the world economy.

That said, it could be argued that the company’s current share price includes a fairly wide margin of safety. It trades on a forward price-earnings ratio of 14.5. While this is not exactly a ‘bargain’ valuation, the company’s 14% forecast annualised growth in earnings per share over the next two financial years indicates that it offers good value for money.

In addition, WPP has strengthened its balance sheet over recent months. In fact, net debt stood at just £1.5bn as at the end of June 2021. This was down £1.2bn versus the same time of the previous year. Its acquisition strategy has meant that it is now increasingly focused on core areas that could provide it with greater flexibility and a nimbler operating structure during a period of intense change for many industries. And, with the company continuing to invest in its digital operations, it appears to be well placed to capitalise on an increasingly online world.

Therefore, it could offer scope for capital growth over the long run. Certainly, risks to global growth are likely to weigh on its short-term progress. But with what seems to be a modest valuation given its forecast growth rate and an improving balance sheet, WPP’s share price could offer good value for money relative to FTSE 100 index peers on a long-term basis.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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