Why WPP and LSE offer FTSE 100 outperformance potential after mixed recent returns

The FTSE 100 index’s flat year-to-date performance hides the high level of volatility that has been present over the past few months. Challenges such as Russia’s invasion of Ukraine, rising inflation and the prospect of a cost of living crisis have caused materially different return profiles for listed companies.

Indeed, the performances of FTSE 100 stocks WPP (LON: WPP) and LSE (LON: LSEG) have contrasted greatly since the start of the year. While WPP has fallen by 11%, LSE’s shares have risen by 12%.

Both companies, however, appear to offer good value for money despite their differing recent share price performances. Their financial prospects, strategies and market positions suggest they could deliver FTSE 100 outperformance over the long run.

WPP

WPP’s recent share price fall is perhaps to be expected, given its reliance on the outlook for the world economy. Although the full economic impact of war in Ukraine is a known unknown, it seems inevitable that global growth will suffer to at least some extent. Similarly, a higher rate of inflation may encourage a tightening of monetary policy that suffocates global GDP growth.

Encouragingly, WPP appears to have the financial position required to overcome what could prove to be a more challenging period than many investors had been expecting. For example, the company finished its latest financial year with a net gearing ratio of just 22%. Net interest cover of almost six further highlights its ability to survive a period of potentially lower profitability. It also continues to make cost savings to improve overall efficiency.

In the long run, the company’s focus on ecommerce and a digital offering could position it for growth. Following its share price fall, WPP shares now trade on a price-earnings ratio of 19. Given its forecast annualised rise in earnings per share of 33% over the next two years, it seems to offer a wide margin of safety that indicates there is scope for a significant recovery in its market value over the coming years.

LSE

LSE’s recent share price rise has been at least partly due to the release of an encouraging set of annual results. They showed the firm is making good progress in integrating major acquisition Refinitiv, as well as delivering on its cost saving and synergy targets. In addition, it reduced leverage to within its target range a year ahead of schedule after increasing debt levels to fund the acquisition of Refinitiv.

The company seems to be well placed to deliver an improving financial performance over the coming years. The acquisition of Refinitiv means it has increased its exposure to data and analytics services, which offer growth potential as greater automation and environmental, social and governance (ESG) trends likely continue. Furthermore, LSE’s increasing proportion of recurring revenues means that its financial outlook could be relatively stable amid an uncertain geopolitical environment.

Looking ahead, the company is forecast to post an annualised rise in earnings per share of 23% over the next two years. This helps to justify a forward price-earnings ratio of 30. As a result, LSE’s risk/reward appeal appears to be attractive and could mean its share price continues to outperform the FTSE 100 index after its impressive first quarter return.