WPP's Layoffs Plan Explained -- Wall Street Doesn't Believe Sorrell's Rosy View of the Future

(MoneyWatch)  Wall Street no longer believes WPP's Martin Sorrell. That seems to be the message in the reaction of Morgan Stanley and Edward Hill-Wood to WPP's 2009 forecast.

WPP said it saw a 2 percent drop in revenues for 2009, when the company released its Q4 2008 results.

But Morgan Stanley thought that was optimistic. The Independent:

Morgan Stanley sounded the alarm, arguing that the market wasn't alive to the impact of what it called "unprecedented economic headwinds". Forecasting a 7 per cent decline in under-lying revenues for this year and another 4.8 per cent fall for 2010, the broker said that, although well placed in the long term, estimates had to be balanced against the near-term risk to earnings.

The projected revenue slip will put renewed focus on WPP's debt. While WPP is now the largest agency network in the world, all those acquisitions have left the company heavily indebted. The Irish Times:

That forecast would bring WPP closer to testing its lending covenants -- a concern as the firm is expected to come to market shortly to refinance about half its ?£650 million debt due in 2010.

That, in turn, puts pressure on everything else inside WPP:

The analyst Edward Hill-Wood added that profitability and leverage may also "undershoot expectations as costs prove surprisingly inflexible and working capital outflows dilute cash flow." He said: "We expect an eventual earnings recovery to lag other cyclicals," he said, scaling back his target price for the stock to 310p from 354p.

... which explains Sorrell's decision to cut 2000 jobs from his agencies.

• See BNET's previous coverage of WPP's finances:
• WPP Q4: Lower Profits Increase Likelihood of More Layoffs
• Video: Why WPP Does Not Run Strip Clubs
• WPP to Lay Off "Several Thousand" on Accounts Where Staff Cost More than 60% of Revenue
• Ogilvy Cuts 150 Jobs; First of "Thousands" Expected at WPP
• Sorrell Used WPP Stock as Collateral for Personal Loans
• WPP Leaves U.K. for Ireland to Avoid Tax
• IS WPP at Risk of Breaching Its Debt Obligations?
• Fitch Cuts WPP's Debt Rating; Suggests Pay Reductions