Is this FTSE 100 turnaround stock now superb value?

Few FTSE 100 stocks have been out of favour over the last couple of years as much as advertising giant WPP (LSE: WPP).

Since March 2017, the company has lost almost 60% of its value on fears over the trimming of advertising budgets by clients, the loss of contracts with others and the acrimonious departure of its founder and former CEO Martin Sorrell.

Today’s full-year results might not be enough to get the market back on the company’s side completely, but they do suggest the £10bn cap juggernaut is slowly turning itself around. 

Not great but not awful

Although falling 0.4% last year, like-for-like revenue less pass-through costs was still better than the range predicted by WPP back in October (between 0.5% and 1%).

Even so, total revenue fell 1.3% over 2018 to £15.6bn. Pre-tax profit also tumbled 30.6% to £1.46bn, partly due to restructuring costs.

Commenting on these numbers, new(ish) CEO Mark Read stated that WPP had made “good progress” over 2018.

While still in the early stages, the three-year turnaround plan to position itself “as a creative transformation company with stronger, more integrated, more tech-enabled agencies” was “already proving effective“.

Geographically-diversified WPP also said that it was “performing strongly in Western Continental Europe, Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe” while attempting to sort things out its US operations.  

Having made 36 disposals in the last 11 months for a total of £849m, WPP’s finances also look more robust than before. At £4.017bn, net debt was £466m less at the end of last year compared to 2017.

Value and income

The stock jumped almost 7% as markets opened this morning, suggesting that results had surpassed investors’ expectations. Should we take this as a sign that WPP’s darkest days are now behind it?

It’s a tough one. Despite recent progress, WPP’s leader reiterated the company’s view that 2019 would be “challenging” (especially in the first six months) as a result of client losses in the previous year.

On a more positive note, Mr Read added that fewer clients were under review than in 2018 and that investment would make the company more competitive in winning business going forward. 

Right now, analysts are forecasting a further drop in earnings, which left the company’s stock trading on a forward P/E of just less than eight before markets opened. Despite WPP’s recent travails — not to mention the ongoing political and economic uncertainty — I still think that looks cheap.

But WPP shouldn’t just be seen as a value play, in my opinion. Those investing for income might also be reassured by the fact that its dividends — while not rising — do look safe for the time being.

The total payout for 2018 was maintained at 60p per share, leaving the stock on a trailing yield of 6.8% after taking into account today’s share price rise.

Even if it doesn’t grow, next year’s cash return is likely to be covered 1.7x by earnings. Two times cover is preferable but this is certainly not as fragile a position to be in compared to some income favourites in the FTSE 100. 

All told, I continue to believe that WPP’s stock offers great value for patient, contrarian investors, even after today’s positive reaction. Although there could be further weakness in the months ahead, I’ll stick my neck out and say that another huge drop looks unlikely.