Friday, April 28, 2006
Invox falls cause portfolio pain
This week, shares in Invox fell almost 30% to end the week at 43p to sell. I am a long way down on my investments in this company.
Worryingly, there has been no material news to accompany this fall. It is as though news about the company is slowly leaking out to investors who rush for the exit. I have lost count of the number of times I have kidded myself that the shares have hit bottom.
So what to do?
In the absence of more news I cannot make an informed decision. Invox's two main divisions have been struggling for awhile now but how much worse can things really get for this company? Even if Invox only manages to achieve EPS of, say, 13p for the financial year, that would put the company on a P/E ratio of just over 3. This is an astonishingly low rating. Only very rarely does the market ascribe such a low valuation to a company earnings. This can be because either
a) the forecast earnings contain an exceptional item that will boost earnings only once
b) a substantial decline in earnings is expected
I know from my research on the company that a) is not the answer. That leaves b) and I can understand, from the recent interim results why the market thinks Invox's earnings are simply not sustainable. The home gaming (scratchcard) and internet service provider business are suffering turnover and margin pressure respectively. On the occassions where the market does apply such a low forward rating, this is normally to companies which are expected to slump to years of losses. This is very possible amongst insurers for example, where disasters, low premiums and a disappointing investment environment can form a deadly triple whammy that can wipe out a company entirely. Or amongst housebuilders, where falling houseprices set against rising raw materials, labour and land costs can push a business into the red.
However, it is difficult to see amongst Invox's divisions a comparable sort of business that can be forced to trade at a loss. Unlike insurers, it is unlikely internet service providers would launch into such an aggressive round of price cuts that profitability became threatened. And unlike the housebuilding industry, Invox sets the prices and the prizes in their home gaming division - so why would losses ever be incurred here?
The only real fear I have is that both businesses could suffer such biting declines in profitability that Invox continues to make a profit for only a few more years, delivering EPS of perhaps 13p this year, followed by 6p, 3p and then 1p. Discounting these earnings by 5% would put Invox on a fair value of 22p, a terrifying half today's share price.
I believe this is unlikely and earnings are likely to stabilise at some level. There is also the possibility of growth through new venture bingoloopy.com . But certainly it is very easy right now to paint a very black picture for this investment indeed.
The Artful Dodger
Worryingly, there has been no material news to accompany this fall. It is as though news about the company is slowly leaking out to investors who rush for the exit. I have lost count of the number of times I have kidded myself that the shares have hit bottom.
So what to do?
In the absence of more news I cannot make an informed decision. Invox's two main divisions have been struggling for awhile now but how much worse can things really get for this company? Even if Invox only manages to achieve EPS of, say, 13p for the financial year, that would put the company on a P/E ratio of just over 3. This is an astonishingly low rating. Only very rarely does the market ascribe such a low valuation to a company earnings. This can be because either
a) the forecast earnings contain an exceptional item that will boost earnings only once
b) a substantial decline in earnings is expected
I know from my research on the company that a) is not the answer. That leaves b) and I can understand, from the recent interim results why the market thinks Invox's earnings are simply not sustainable. The home gaming (scratchcard) and internet service provider business are suffering turnover and margin pressure respectively. On the occassions where the market does apply such a low forward rating, this is normally to companies which are expected to slump to years of losses. This is very possible amongst insurers for example, where disasters, low premiums and a disappointing investment environment can form a deadly triple whammy that can wipe out a company entirely. Or amongst housebuilders, where falling houseprices set against rising raw materials, labour and land costs can push a business into the red.
However, it is difficult to see amongst Invox's divisions a comparable sort of business that can be forced to trade at a loss. Unlike insurers, it is unlikely internet service providers would launch into such an aggressive round of price cuts that profitability became threatened. And unlike the housebuilding industry, Invox sets the prices and the prizes in their home gaming division - so why would losses ever be incurred here?
The only real fear I have is that both businesses could suffer such biting declines in profitability that Invox continues to make a profit for only a few more years, delivering EPS of perhaps 13p this year, followed by 6p, 3p and then 1p. Discounting these earnings by 5% would put Invox on a fair value of 22p, a terrifying half today's share price.
I believe this is unlikely and earnings are likely to stabilise at some level. There is also the possibility of growth through new venture bingoloopy.com . But certainly it is very easy right now to paint a very black picture for this investment indeed.
The Artful Dodger
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