2 FTSE 100 shares with improving prospects in a global economic recovery

Robert Stephens, CFA, discusses the prospects for two FTSE 100 stocks that have experienced a tough 12 months due to Covid-19.

Covid-19 has had a detrimental impact on the performances of a wide range of FTSE 100 shares. 

Among them are advertising and branding specialist WPP (LON:WPP). A slowing global economy has disrupted its financial performance over the past year. 

Meanwhile, lockdown measures have restricted the availability of elective surgeries. This has hurt the financial performance of medical devices business Smith & Nephew (LON:SN.).

In the short run, both companies could experience further share price turbulence. Indeed, the prospects for Covid-19 and the world economy could quickly change. However, they appear to offer long-term recovery potential.

WPP

WPP’s 2020 financial results highlighted the scale of difficulties caused by the pandemic. The firm’s revenue declined by around 8%, while its earnings per share fell from 78.1p in 2019 to just under 60p in 2020.

Despite falling top and bottom lines, the company made progress in a number of areas in 2020 that could act as a platform for future growth. For instance, it reduced net debt by £0.8 billion so that it now stands at £0.7 billion. It also continued with a strategy of simplifying its operations through asset sales and aligning its existing agencies. This could make the business increasingly adaptable to a fast pace of change.

Covid-19 has prompted a shift towards the digital economy. This could suit WPP’s strategy, which has been focused on increasing its capabilities within online advertising. It may even have a greater competitive advantage versus sector peers post-coronavirus than prior to the pandemic.

WPP’s share price has largely recovered following the March 2020 stock market crash. Despite this, it trades on a forward price-earnings ratio of around 12 using 2022’s financial forecasts. As such, it could offer good value for money, with its status as a cyclical business making it leveraged to a global economic recovery.

Smith & Nephew

Smith & Nephew’s revenue declined by 12% on an underlying basis in 2020, while trading profit of $683 million was 42% lower than in the previous year. Its financial performance was severely impacted by a reduction in elective surgeries as Covid-19 cases forced healthcare systems across the world to delay non-urgent care.

However, the company’s financial prospects could improve as Covid-19 containment measures abate. Elective surgeries are likely to return in greater volume as the impact of vaccination rollouts on Covid-19 cases becomes more pronounced.

In the meantime, Smith & Nephew has strengthened its competitive position. For example, it increased research spending by 5% in the 2020 financial year. It has also made several acquisitions to broaden its operational capabilities, while it expects to reduce annual operating costs by $200 million from 2025 onwards.

In the long run, the company’s financial outlook could be catalysed by factors such as an ageing global population and changing lifestyles. This may equate to higher incidences of conditions such as diabetes that require wound management treatment for chronic and acute wounds.

The stock market expects the firm to generate double-digit earnings growth over the next two financial years. As a result, its forward price-earnings ratio of 23 may prove to be relatively attractive.