The world’s biggest advertising group, WPP plc (WPPGY - Analyst Report), reported strong results for full year 2014 with double-digit earnings and mid-single-digit revenue growth year over year, combating significant currency headwinds. Earnings per share for 2014 improved 15.7% year over year to 80.5 pence ($1.33) on the back of revenue growth across all geographic regions and strong performances from all operating segments.

Revenues increased 4.6% to £11,529 million ($18,995.2 million) in 2014 with like-for-like growth of 8.2% and inorganic growth of 3.1%, partially offset by a negative impact of 6.7% from currency translation effects. The company recorded strong revenue growth in U.K., U.S., and Asia Pacific, even as the pace of growth slowed in Latin America and China and Europe continued to remain sluggish.

Reported billings for the year increased 6.8% to £46.2 billion ($76.1 billion), driven by a strong foothold in net new business league tables.

Revenues by Region

During the year, revenues in North America displayed steady growth, climbing 4.1% year over year to £3,900 million ($6,425.6 million) on a reported basis. The surge in revenues was led by strong performance from the company’s media investment management and parts of the Group’s public relations & public affairs, healthcare and direct, digital and interactive operations.

Revenues in the U.K. improved 16% to £1,640 million ($2,702.1 million), driven by healthy growth in advertising and media investment management and public relations and public affairs businesses.

Revenues in Western Continental Europe declined 0.9% year over year to £2,569 million ($4,232.7 million) with  Austria, Belgium, France, Spain and Switzerland showing weakness, which was somewhat offset by steady performance in Italy, Germany, the Netherlands and Turkey.

In Asia Pacific, Latin America, Africa, the Middle East and Central and Eastern Europe, revenues rose 4.6% year over year to £3,420 million ($5,634.8 million) on a reported basis, driven largely by robust performances in Central and Eastern Europe, Africa and BRIC countries (Brazil, Russia, India and China). However, the strength of the pound sterling against the currencies of many of these countries continued to impact results negatively.

Revenues by Segment

By segment, Branding and Identity, Healthcare and Specialist Communications showed robust performance in 2014 with revenues of £3,074 million ($5,064.7 million), rising 3.5% year over year on a reported basis and 9.5% in constant currency. The segment witnessed robust growth in direct, digital and interactive businesses, particularly from OgilvyOne, JWT Mirum, WPP Digital, VML and AKQA, while some of the healthcare and branding & identity businesses remained sluggish.

Revenues from Advertising and Media Investment Management, which turned out to be the company’s strongest performing sector in 2014, improved 12.1% to £5,134 million ($8,458.8 million) on a reported basis, with 19.8% growth on a constant currency basis. While Advertising gained traction in Africa and the Middle East, Media Investment Management was strong across all regions with particular strength in North America, the United Kingdom and Asia Pacific.

Data Investment Management’s revenues declined 4.7% year over year to £2,429 million ($4,002 million). The weakest sub-sector continued to be the custom businesses in mature markets, where discretionary spending remained under review by clients.

Revenues from Public Relations & Public Affairs also showed weakness, contracting 3.1% year over year on a reported basis to £892 million ($1,469.7 million). However, on a constant currency basis, the segment returned to top-line growth with 2014 revenues up 2.6% year over year.

Margins

Operating margin for full year 2014 came in at 19.1% on a reported basis, up 10 basis points year over year.

Balance Sheet & Cash Flow

Free cash flow for the twelve months ended Dec 31, 2014, was £1.168 billion ($1.924 billion), of which the company utilized £495 million ($815.6 million) for acquisitions, £511 million ($841.9 million) for share repurchases and £460 million ($757.9 million) for dividends.

Average net debt was flat year over year at £3 billion ($4.9 billion), as sustained improvement in working capital was offset by significant acquisition spending and share buybacks.

WPP repurchased 41 million shares at an average price of £12.45 ($20.5) per share during the year. The company maintains its share buyback target to 2%–3% of share capital in 2015. Dividend per share of 38.2 pence (62.9 cents) in 2014 was up 11.7% year over year with a payout ratio of 45% versus 42% in 2013.

Acquisitions & Partnerships

WPP completed 65 acquisitions worldwide across all spectrum of its business in 2014. Of these, 36 acquisitions and investments were made in new markets, 53 in quantitative and digital and one in healthcare in the U.S., with 25 quantitative and digital deals in new markets. The acquisitions were in accordance with the company’s strategic focus on new markets, new media and data investment management.

WPP also recently formed two important technology partnerships in keeping with its strategic objectives of developing data and applying technology to optimize marketing value. Its alliance with AppNexus, announced last September, will support the technological proficiency of Xaxis.

Also, its collaboration with Rentrak, announced last October, will aid in developing new systems for off-line and digital television and film audience measurement. These collaborations will help WPP in leveraging its substantial technology assets, without investing huge sums of money for the same.

Outlook

WPP is targeting like-for-like revenue and net sales growth of over 3% in 2015. Further, the advertising giant expects to expand operating margin by 0.3 margin points in 2015 on a constant currency basis, with earnings increasing 10%–15%. With January like-for-like revenues up 6.7%, WPP seems on track to combat economic and currency headwinds and achieve its growth targets.

Our Take

With sustained revenue growth in faster-growing geographic markets, strategically targeted acquisitions, and continued emphasis on improvement in operating costs to enhance margins, WPP expects its growth momentum to continue in 2015. The group might also gain from favorable currency swings this year, as the British Pound recently showed signs of weakness after its strength against the U.S. dollar and Euro weighed on profits in 2014.

However, economic fragility of the Eurozone, political instability in the Middle East and a slowdown in the Russian economy may prove to be headwinds for the company, going forward. Also, macroeconomic risks continue to drive companies to be cautious with regard to advertising and marketing spending.

To sum up, WPP expects to increase sales and profitability in congruence with last year’s growth, as it streamlines its operating cost structure and concentrates on winning new business amid economic uncertainties.

WPP currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the consumer discretionary sector that are worth looking into now include Isle of Capri Casinos, Inc. (ISLE - Snapshot Report), Gildan Activewear Inc. (GIL - Snapshot Report) and Central Garden & Pet Company (CENT - Analyst Report), each holding a Zacks Rank #1 (Strong Buy).

Note: £1 = $1.6476 (period average from Jan 1, 2014 to Dec 31, 2014)