Fear of the unknown driving ITE’s price down
Posted on March 2, 2009 by Richard Beddard
Filed Under Companies |
The sum of all fears
Maybe it’s because I watched the The Sum of all Fears on telly last night, but my febrile emotional state is resisting ITE (ITE).
ITE, which organises trade shows, does a lot of its business in Russia, £66m in 2008 or about 60% of its sales. The Sum of All Fears, a film in which CIA agent Jack Ryan single handedly prevents nuclear war between Russia and the USA, reminded me that I have no idea about Russia. Maybe the film’s producers don’t either.
But since ITE looks a safe bet on the basis of its share price and financial strength, I thought I should investigate a third big risk. That those precious profits upon which I based my assessment of the company’s price, and part of my assessment of its financial strength, don’t come from an economy like ours.
Russia’s future economy may not even be like its economy in the recent past.
Just look at the Economist’s GDP forecasts, not something I do very often, because I’m not very confident about forecasts. GDP grew in the UK by 0.7% last year and may fall by 2.6% this year. The US grew by 1.2% last year and may fall by 2% this year. Russia grew by 6% and may grow by 1% this year.
Industrial production fell by 9% in the UK, 10% in the USA and 16% in Russia last year. Meanwhile consumer prices rose by less than 4% in the UK and the USA and by 14% in Russia.
Russia’s numbers look so big. Even though it may still grow next year, the economy is volatile, and volatility means uncertainty even before you consider Russia’s politics, and the vodka.
The Bank of England’s forecasts for prices and output, come in the form of a fan chart that displays a wide range of possible outcomes. Surely the Bank of Russia’s fans would be much wider, and the worst case, much worse.
Since investing in ITE means investing in Russia, and its former satellites in Central and Eastern Europe, it seems like an even more risky proposition than investing in our recession economy.
That kind of thinking can only make the problem worse, of course. The reason this recession has spread to the booming economies of Eastern Europe and Asia is that we’re buying less of their stuff, and our bankrupt banks can’t lend as much to them.
As Reinhart and Rogoff say:
When no foreign financing is possible, emerging markets have seen consumption and investment implode during severe financial crises.
If protectionism takes hold, emerging markets will suffer most.
In which case, one can imagine, a company that runs international trade shows would be particularly vulnerable, however much cash it has, and however profitable it seems.
Normally I’d ignore the story and go with the numbers. An expensive, financially weak company is never a good risk to my mind while a cheap, financially strong company is usually a good bet.
But this time the sum of all fears is getting the better of me, which is a shame as I had earmarked ITE for my next Share Sleuth article, deadline Friday.
Comments
2 Responses to “Fear of the unknown driving ITE’s price down”
Leave a Reply
[...] stock. Top-down the case looks ropey. Financial crises are worse in emerging markets (see here, and here) so any company doing business in, say Russia, or Kazakhstan, faces an even more [...]
I noticed that this is not the first time at all that you write about this topic. Why have you chosen it again?