This Company Might Not Need Its Long Time CEO After All
Some individuals become intertwined with their company. This is, of course, true for small businesses but is sometimes the case for large, publicly traded companies. Examples of this pattern include Microsoft which became synonymous with Bill Gates or GE and Jack Welch in the 1990’s.
Sometimes, the leader successfully passes the role of CEO to someone else and other times the company stumbles under a new leader. Microsoft offers an example of the former and GE the latter. Less well known, and in the news right now, is WPP plc (NYSE: WPP).
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WPP reported more than $75 billion in sales over the past twelve months. It is a holding company that provides communications services.
These services cover a range of disciplines, which include advertising, media investment management; data investment management; public relations and public affairs; branding and identity; healthcare communications; direct, digital, promotion and relationship marketing, and specialist communications.
Among the companies WPP operates are global, national and specialist agencies, which include Bates CHI&Partners, Grey, JWT, Ogilvy & Mather Advertising and Y&R. It provides media planning and buying, and specialist sponsorship and branded entertainment services from GroupM companies.
An Abrupt Departure
WPP founder and former Chief Executive Martin Sorrell recently, and surprisingly, resigned in April. The company has not explained why Sorrell resigned except to say it was in response to an allegation of personal misconduct.
Sorrell had led WPP since he founded the company in 1986, helping to transform a then little known U.K. company that made wire shopping baskets called Wire & Plastic Products into the largest advertising holding company in the world.
But, according to analysts, “the business model Mr. Sorrell pioneered—snapping up an alphabet soup of ad agencies—is being called into question amid wider industry headwinds.
Ad companies recently have also grappled with a scandal over the transparency of the industry’s ad-buying practices, and the sector is dealing with the power of tech giants Facebook Inc. and Alphabet Inc.’s Google.”
As the company faced a challenging transition, traders sold the stock.
Sorrell’s resignation creates an opportunity for the company to reinvent itself and some analysts believe a breakup of the company would be the best way to unlock shareholder value.
Analysts Might Get What They Want
On Monday, the company delivered its first earnings report since Sorrell’s resignation.
The company reported like-for-like net sales—a measure used to judge its underlying performance—declined just 0.1% in the three months to March 31. Analysts were braced for a 1% drop.
The stock jumped as trades focused on the prospect of asset sales and the slightly better than expected sales data.
Executive Chairman Roberto Quarta has appointed Mark Read, previously chief executive of WPP agency Wunderman, and Andrew Scott, who was WPP’s corporate development director and chief operating officer for Europe, as joint-chief operating officers amid a search for a new CEO.
After the financials were released. Read said a strategic review is under way and signaled that asset disposals, or selling down stakes in certain businesses, were options.
“We’ve got work to do to accelerate growth,” Mr. Read said. “We don’t believe it makes sense to break the group up, but we’re looking at how we can maximize shareholder value with the assets that we have.”
He said that selling down some of WPP’s minority stakes were “a logical place to look” to reduce debt. The company has said it wants to bring down its debt-to-core-earnings ratio over the next 12 to 18 months.
“We are going to have a look at the minorities portfolio,” Mr. Scott told analysts Monday, but “we’re not embarking on a disposal program across the business.”
The stock may have support near the recent lows.
That means a put selling strategy could generate low risk income in the stock.
Trading the Trend
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for WPP
For WPP, a bull put spread could be opened with the May 18 put options. This trade can be opened by selling the May 18 $80 put option for about $0.60 and buying the May 18 $75 put for about $0.10.
This trade would result in a credit of $0.50, or $50 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $5 ($80 – $75). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $450 ($500 – $50).
The potential gain is about 11% of the amount of capital risked. This trade will be for about three weeks and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.