Sorrell the bear tempers strong WPP earnings report

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If you just looked at the numbers in WPP Group's earnings report, you'd think it was clear sailing ahead for the advertising industry.

But Chief Executive Martin Sorrell remained as bearish as usual in a conference call with analysts and even downplayed the effect of a possible acquisition of Grey Global Group.

In spite of announcing the holding company's strong growth-an 11.1% rise in first-half net income to $193 million-Mr. Sorrell repeated his stock warnings about potential economic hitches on the horizon. Those include uncertainty presented by the upcoming U.S. presidential election as well as the fiscal deficit, threat of inflation and the weak dollar-all issues that will face whomever wins the race for the White House.

"There are some concerns on both sides of the Atlantic over whether the stronger consumer spending we've seen will weaken and government spending may be under threat as well," Mr. Sorrell said, adding that any drop in consumer spending, triggered by rising interest rates or oil prices, could be offset by increases in corporate spending.

"Corporate profitability, liquidity and margins are strong and have been growing recently at levels not seen since 1984," he said.

This gloom tempered an otherwise positive report with a growth in revenue of 6%, largely because of increased spending on the Olympics, the presidential elections, and the European soccer championships.

double-digit growth

The group saw double-digit growth in all its major regions except continental Europe and reported a 28.9% revenue growth in Asia-Pacific, Latin America, Africa and the Middle East. North America rose just over 11%. It also saw a strong six months for new-business wins, among them the $500 million to $600 million HSBC business.

Despite Mr. Sorrell's warning, WPP raised operating-profit-margin targets for 2005, to 14.5%, and for 2006, to 15%. The 15% margin has been a long-term goal of Mr. Sorrell's, but he pushed back his timetable in 2001 due to the advertising recession.

The results were largely in line with expectations, as was Mr. Sorrell's reiteration of WPP's interest in Grey. Analysts have been concerned that Grey could come at too high a price, especially if a bidding war erupts involving Havas and a number of private-equity firms .

"If you look at Grey in the context of WPP, it's not large," he said. "Combined, Grey's revenues would be about 11% or 12% of the combined group, so it's about twice the size in revenue terms of Cordiant last year." The call came almost a year to the day from when WPP closed its acquisition of Cordiant Communications Group.

Asked what would make him "walk away" from Grey, Mr. Sorrell replied, "Well, as we've got [Grey Chairman-CEO] Ed Meyer on the phone call, you should probably best ask him that." Neither WPP nor Grey would comment as to whether Mr. Meyer was actually listening in on the call.

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