The Investment column: Sorrell works miracles at WPP

Martin Sorrell may have created WPP's problems but you can't deny he has done an impressive job digging the advertising and PR group back out of its self-inflicted hole. Pre-tax profits for 1996 were pounds 153.3m compared with under pounds 8m in 1992. Operating profits have grown over that period from 5.9 per cent to 10.8 per cent. Net debt has fallen by two- thirds from pounds 437m to pounds 145m and could be wiped out completely within two years.

That is a remarkable performance for a company that received the last rites so many times while the bankers toiled over its many refinancings that its ultimate recovery is nothing short of a miracle.

Running down WPP's profit and loss account it is hard to avoid the conclusion that everything is going the company's way. Revenues of pounds 1.69bn were 9 per cent ahead of 1995 but by the time a 6 per cent reduction in costs was accounted for, operating profit was 22 per cent better at pounds 182.4m. Lower interest rates and smaller debts helped the pre-tax profit line to a 35 per cent increase to pounds 153.3m and by the time a lower tax charge had had its impact, profit attributable to shareholders was 46 per cent higher. No wonder the final dividend rose 32 per cent to 1.144p.

Shareholders, and Mr Sorrell of course, will now focus on how much more can still be done to bring WPP up to the standards of its best peers. In advertising, Omnicom and Interpublic achieve operating margins of between 13 and 15 per cent, and their best businesses as much as 17 per cent. In PR, Shandwick generates a return of more than 10 per cent.

With strong brands such as Ogilvy & Mather, J Walter Thompson and Hill & Knowlton, there is no reason why WPP should not aspire to that sort of performance. This, the company believes, would by itself add another pounds 25m to operating profit.

House broker Panmure Gordon believes strong sterling will hold WPP's profits back a bit this year from previous expectations of pounds 180m to about pounds 175m. Lower tax, however, will keep earnings per share at just over 15p.

That puts the shares on a prospective price/earnings ratio of 16 at 253p, down 14p. Given the scope for further growth, that's good value.