The Investment Column: WPP looks for further growth

WPP is an object lesson in the virtues of bottom fishing. Although investors who backed Martin Sorrell's attempt to build an advertising empire by debt-funded acquisition in the late 1980s all but lost their shirts, those who got in when the future looked bleak have done extremely well. In seven years, the share price has risen elevenfold. Of course, Mr Sorrell, through his lucrative share scheme, has also pocketed a few bob.

As with all recovery stories, the trick is calling the point when the recovery is complete and the company starts performing in line with the usual ups and downs of its industry. Analysts have signalled that point several times in the past, and been surprised. Yesterday's results, which showed pre-tax profits rising 16 per cent to pounds 177m last year, show that WPP is still improving. Knock out the effects of the strong pound, and profits were up 28 per cent. Operating margins improved by a full percentage point to 11.8 per cent.

Can it get any better? Mr Sorrell - who needs to get the WPP share price above 304p and keep it there for two months to receive his final tranche of shares - clearly thinks it can. He sees no reason why WPP should not make similar margins to competitors like Interpublic and Omnicom, which enjoy a return on sales of 13 to 15 per cent. So he is targeting another 1 percentage point margin improvement, to 13.8 per cent, this year.

Given that WPP is still picking up plenty of new business, that looks achievable. Mr Sorrell expects the global advertising market to grow by about 5 per cent in the coming year, and thinks WPP will take market share. Although Asian turmoil will dampen growth, Mr Sorrell believes those markets will prove lucrative in the long term.

Then there is WPP's cash flow. Large acquisitions are apparently too expensive, but the company spent pounds 68m on a string of smaller deals last year, and is looking for more. Even so, there is enough left over for WPP to buy back pounds 50m of its own shares this year - twice as much as it had originally planned to.

So where does this leave WPP shares, up 12.5p to 297.5p yesterday? Compared with their US peers, they look cheap. But, even taking a conservative assumption of 4 per cent revenue growth in future years and further slight margin gains, WPP's earnings should grow at about 15 per cent a year. The WPP recovery may be over, but with the shares trading on a market rating they still look good value.