WPP profits rise on 'dead-cat bounce'

The world's largest advertising group saw its profits jump in 2010. Could this be evidence that things are looking up?

by Emma Haslett
Last Updated: 24 Aug 2011
WPP, the world’s largest advertising company, published figures today showing a 28.5% growth in profits. Revenue was also up by 7% to £9.33bn, while pre-tax profits rose from £662.6m in 2009 to £851.3m. Not bad going. And given the world’s largest advertising group is often used as a bellwether for the global economy, it’s not just a good thing for founder Sir Martin Sorrell and the rest of WPP’s shareholders. So what’s caused the jump? The group says it’s been boosted by a recovery in television advertising and other ‘traditional’ media, as well as a ‘dead-cat bounce’ in the United States. Doesn’t sound so encouraging now, does it…

In fact, WPP said that growth in the US was the most surprising aspect of its performance. Apparently, America was behaving much like an emerging market, growing at 7% against a GDP growth of about 3%. According to the firm, that was partly down to an increase in advertising activity among sectors like cars, financial services and retail, which had upped their ad spend after cuts during the recession. And the mid-term elections didn’t do much harm, either, with increased spending among politicians.

So what’s this dead-cat bounce about? It’s a phrase more often used in the financial sector to describe a small rise in a declining stock – the idea being that even a dead cat will bounce if you drop it from a great enough height. And according to WPP, that’s exactly what’s happening with the US ad market: yes, it may have been growing faster than the country’s GDP (7% versus 3%). But as a proportion of GDP, US ad spend was at its lowest ‘since the mid-1970s’ in 2009, and recovery is slow-going. That’s partly because there was ‘excess traditional media inventory’ (ie spare advertising slots), which drove prices down and made traditional media ‘relatively more attractive’. So while activity was up, prices were down.

Nevertheless, it doesn’t look like the firm is suffering unduly: WPP says that it expects like-for-like growth to be up by 5% this year, with operating margins rising by 0.5 points to 13.7%. And while there isn’t a repeat of last year’s mid-term elections to boost revenues this year, 2012 promises both the presidential elections in the US and the Olympics, which will provide plenty of opportunity for firms to splash out on advertising.

But while things are looking up for WPP, it’s far from clear that the same can be said of the global economy generally. Keep your fingers crossed…

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