WPP 'over-exposed' to consumer staples ad spend, Deutsche downgrades

Deutsche, which cut its target price to 1,750p from 1,890p and swapped its preference for rival Publicis, said it disagreed with the market's increasingly prevalent view that advertising agencies are losers in a structural shift, caught in the middle between the tech giants and the consulting behemoths.

"Counter to consensus, we think the agencies can cope with the perceived structural threats, which include fee pressure, commoditisation of media buying and competition from consultants. These concerns are now reflected in current valuations, with the low-growth but cash-generative agency stocks in value territory," analyst Chris Collett said.

He now believes WPP's long-term model for delivering 10-15% annual growth in earnings per share "will come under pressure due to high exposure to staples companies, margins that are starting to push towards the company's targeted ceiling and acquisition-led growth, which is adding to complexity instead of reducing it".

The long-term positive stance on WPP was reversed, with organic net sales growth cut to 1.2% from 2.1% which is below Vuma consensus growth of 2.0% and Deutsche's estimate of agency industry growth of 3.2%.

Meanwhile the previous neutral or sceptical view on Publicis was also reversed, now seen as well positioned thanks to its new CEO driving change, recent moves to integrate agency silos, exposure to consulting and margin growth potential, which could deliver 8% EPS upside in 2018.

Its strong balance sheet could enable future cash returns, Collett thought.