The Investment Column: Stake in tireless Sir Martin's growing empire at WPP is worth holding on to

Uncertain outlook makes Harvey Nash one to avoid - YouGov's price is high enough now
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The Independent Online

Have companies moved from cost-cutting mode to growth? WPP, the advertising giant that reported first-quarter results last week, has detected this shift.

Have companies moved from cost-cutting mode to growth? WPP, the advertising giant that reported first-quarter results last week, has detected this shift.

Advertising and other marketing efforts are one of the easiest expense items to cut. So, if WPP companies are looking again to grow the top line - partly by brand building and product promotion - then advertising groups should be in for a good time.

The first three months of 2005 delivered perky organic growth of almost 6 per cent at WPP, with revenues rising by 16 per cent overall. Total sales jumped to £1.11bn, reflecting the effect of including the Grey Global business acquired last year. It was the third successive quarter of growth.

The 6 per cent underlying growth rate was better than the company's guidance for this year, but the comparatives do get tougher for later quarters in 2005 (up against last year's boom events of the European football championships, the Olympic games and the US presidential election). Still, we should expect WPP to beat its organic growth guidance of 3 to 4 per cent for 2005.

Asia Pacific and Latin America remained the strongest growing areas for WPP. Europe is mixed, with France and Germany continuing to be sluggish. The UK, Eastern and Southern Europe are all showing decent performance. There has been no slowdown in the US so far, as had been feared.

WPP remains a highly aggressive company. It may well get involved in any bid or break-up that transpires at its rival Havas, which is the subject of an assault from the corporate raider Vincent Bollore.

Sir Martin Sorrell, WPP's chief executive, admits to close contact with Mr Bollore but remains coy about WPP's intentions.

WPP carefully flags up its likely performance and, even if it is usually on the conservative side, that is in the share price, at 588p.

Well worth holding though, as Sir Martin never tires of canny empire-building.

Uncertain outlook makes Harvey Nash one to avoid

Surging profits at Harvey Nash, the IT recruitment specialist, did not help stem the recent downward trend in the shares. The stock recorded its biggest drop in two and a half years yesterday - even though Albert Ellis and David Higgins, the new and the old chief executives, bought 10,000 shares each. It has slid 32 per cent so far this year.

The Independent's share tips for 2005 included Harvey Nash but we had to let it go in March because it fell below our stop-loss limit. The poor stock performance has been somewhat puzzling given that IT markets continue to recover strongly.

Yesterday's annual results, for the year to 31 January 2005, showed profits, before tax, goodwill and exceptional items, jumped to £3.6m from £1.1m, with the US performing particularly strongly. Last year was a strong one for the IT recruitment industry as businesses in the UK and the US stepped up spending on IT systems. Even continental Europe, where economic growth continues to be sluggish, improved with profits more than doubling to £1.4m.

However, despite last year's strong results Harvey Nash failed to reassure investors. The company will take a short-term hit of £1m this year it increases spending on infrastructure and new outsourcing services. While this should set the company up well for the longer term, it prompted analysts to downgrade their forecasts for this year.

More significantly, UK business confidence has weakened, affecting Harvey Nash's consultancy division, which is regarded as a lead indicator for the group. Sales in the unit fell from £7.5m in last year's first half to £6.3m in the second. With the outlook uncertain, avoid the stock.

YouGov's price is high enough now

There could hardly be a more topical flotation than YouGov, the pollster. Yesterday was the first day of trading in its shares, which closed at 146.5p, a healthy 11.5p rise on the listing price.

The company claims a good record on calling previous elections, but most of its revenues come from market research for companies.

Founded in 2000, YouGov was immediately into profit. Its growth has been impressive and, if forecasts from the broker Hardman provecorrect, will remain so. In the process, the YouGov brand has become well-known and credible.

Its founders, Stephan Shakespeare and Nadhim Zahawi, decided that traditional polling (by phone or face-to-face) was not producing good results and that by using the internet, it was possible to use much bigger samples and get faster responses.

The company's great asset is a panel of 89,000 internet respondents, designed to mirror the UK demographically, who are paid to participate in its surveys.

If YouGov's methodology wins out - it claims advantages on accuracy, anonymity and speed - it is well-positioned. Rivals say that given relatively low internet penetration in the UK, this is not a representative way of doing surveys. However, internet-based opinion research is much more established in the US and there seems little reason to doubt that we will follow.

Market research as a sector is not growing as fast as it did in the 1990s, but still faster than most other areas of the media sector.

YouGov has sold itself as a growth story, but that is already reflected in the shares, which are trading on a multiple of 27 times this financial year's forecast earnings and 20 times next year's. That seems high enough.

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