‘No Complaints’, Says Investor as Merrill Downranks WPP

22 August 2002

WPP Group, the world’s largest agency holding company, came under the microscope as investors and analysts digested its H1 profits-plummet, reported Tuesday [WAMN: 20-Aug-02].

Among the side dishes accompanying WPP’s plat du jour was the matter of accounting for stock options – of which chief executive Sir Martin Sorrell has been a major beneficiary in recent years. But there is growing dissatisfaction among investors in general that the omission of such options from income statements artificially boosts profits.

WPP said it will desist from the practice forthwith, making it the first of the global big three agency groups to do so. Applied retrospectively [which it won’t be], the treatment of stock options as expenses would have reduced WPP’s 2001 operating profit by 2.8% from £507.2 million ($773.84m; €791.59m) to £493.0m. In the half-fiscal to June 30 2002, operating profit of £201.4m would have been shaved by 0.6%

Interpublic Group seems likely to follow suit. “[This] is definitely something we're looking at,” said a spokesperson. Omnicom, however, declined to comment.

Despite the discouraging numbers, Sir Martin has not lost his investor-appeal. Indeed, he is winning air miles for his caution and straight talk “Sorrell is meticulous with his numbers,” says Lisa Rapuano, svp/director of research at one of WPP’s main shareholders Legg Mason Funds Management. “We’ve got no complaints.” [And as WAMN noted on 25-Jun-02: “It is not unknown for Sir Martin to under-promise and over-deliver.”].

Meantime, investment bank Merrill Lynch has cut its price target for WPP from £7.60 to £7.00. Merrill also reduced its margin forecast, but retained the group’s intermediate term ‘buy’ rating.

WPP shares on the London Stock Exchange fell in the wake of Tuesday’s results, slipping 4% from £4.835 to £4.64, and down again on Wednesday to close at £4.61

Data sourced from: Multiple sources; additional content by WARC staff