Investment: Internet billings drive WPP growth

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WPP, the advertising group whose shares have more than doubled since the stock market recovery started in autumn last year, continued its good run yesterday with a 19 per cent increase in full-year profits and a pledge of more growth to come. However, the shares fell by 4 per cent to 464.75p as investors took profits after the recent strong run.

WPP, whose businesses include J Walter Thomson and Ogilvy & Mather, saw billings rise by 10 per cent to pounds 8bn, helped by high-profile campaigns such as IBM's e-business campaign as well as others for Ford, Unilever and American Express.

Internet billings, itemised separately for the first time, totalled $120m (pounds 74m) as the group's clients increasingly took banner advertisements on popular websites.

Margins rose by a full percentage point to 12.8 per cent. The group's target is to reach 14 per cent in two years, while longer-term aims could be to attain the 15 to 16 per cent level reached by top rivals such as Omnicom.

Fixed costs, principally salaries and property costs, are now below 50 per cent of revenue. Variable costs such as staff incentive payments have risen as a proportion, giving WPP a cushion in the event of a downturn.

Analysts said fears of recession could have driven some profit taking yesterday as advertising is seen as an early casualty of any fall in consumer spending.

Although Martin Sorrell, WPP's chief executive, was positive on growth prospects, particularly in the US and continental Europe, there are worries over Latin America and the UK.

WPP is gradually shifting the balance of its business so that it reduces its reliance on advertising, which now accounts for less than 50 per cent of group revenues. Growth sectors include specialist communications in areas such as e-commerce activities and corporate identity work.

On current-year profit forecasts of pounds 240m the shares trade on a forward multiple of 23. That is still at a discount to the market, but high for cyclical businesses such as advertising and public relations.

However, the group's broker, WestLB Panmure, points out that the current year's 10 per cent organic earnings growth will be supplemented by infill acquisitions and a pounds 50m share buyback that will further enhance earnings.

This could lead to further outperformance, but after the strong rally private investors could do worse than follow institutional shareholders and lock in some profits.