Don't Be So Shocked, WPP's Troubles Are Legion By Now

(Bloomberg Gadfly) -- WPP Plc, the world's biggest advertising agency, apparently didn't get the memo that the animal spirits were back.

On Friday it predicted a tepid 2 percent increase in net revenue on a comparable basis this year, lower than the 3 percent that analysts expected. The shares slid the most in more than eight years.

The reaction looks overdone -- the troubles in advertising are hardly a surprise. Number two player Omnicom Group Inc. already issued similarly prudent guidance a month ago based on U.S. weakness. Plus, WPP's lower outlook can be attributed in large part to contract losses with AT&T Inc. and Volkswagen AG that have been known since last summer.

The bottom line is that investing in the big advertising agencies remains a bet on macroeconomic growth. That's because the pie of business that they compete for is not really getting any bigger.

If anything, the risk is that it'll get smaller as big advertisers like Procter & Gamble Co. and Unilever NV demand lower fees and web giants like Facebook Inc. and Google rise in influence. Investigations last year into opaque practices in buying advertising space known as rebates also could curb a particularly profitable corner of the ad agencies' business.

These challenges are real but they're not new. CEO Martin Sorrell has been dealing with these changes rather ably in recent years, unlike arch-rival Maurice Levy at Publicis Groupe SA, who erred in his M&A strategy and lost market share as a result. WPP earnings per share have been increasing since the 2009 global recession, and reached 104 pence last year from 83 pence in 2015.

The more prosaic truth is that WPP will do better than what Sorrell called his "cautious guidance" if global growth accelerates. That could come if U.S. expansion actually turns out to match heady expectations, or if Europe emerges unbruised from its year of election turmoil. Sorrell, who is a frequent commentator on the global economy and politics, knows this better than anyone.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

To contact the author of this story: Leila Abboud in Paris at labboud@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.