The First Sector to Feel the Pain as Recession Grips
Aug 10th, 2008 | By David Stevenson | Category: International InvestingThere’s been plenty of gloomy news on the UK economy in the past month, from grim data on house prices (down 8.8% in the past year, says Halifax) to miserable surveys in manufacturing and the service sector. But how is all this grim data affecting real companies?
There’s one sector you should watch more closely than any other – including banks and retailers – for early warning signs on just how bad a downturn is going to be. That’s advertising.
Ad spending gives a strong clue as to what companies really believe is going to happen within their businesses in around 12-18 months’ time. And the bad news is that the long-term view for British business is as poor, if not worse, than some of these surveys suggest
Want to know just how bad things will get? Look at advertising
Anyone unfortunate enough to be a shareholder in ITV (LON:ITV) has lost a lot of money this year. The price is down nearly 60% in the past 12 months, compared to a wider market fall of 15%. And the shares shed 6% on Wednesday alone after first-half results got a poor reception from investors.
The plunge isn’t the stock market’s revenge on ITV for pumping out televisual treats such as “I’m a Celebrity… Get me out of here,” much as it would be richly deserved. And in fact, the top line results weren’t that bad. Group revenue for the six months to June 30th nudged up an unexciting but respectable 3%, which was a little better than the City had expected.
The real problem was a massive £1.6bn charge, which turned last year’s £105m interim profit into a £1.5bn loss, and saw the dividend cut in half. This was all down to sharply reduced advertising revenue forecasts for this year and next.
As if the raw numbers weren’t bad enough, the words of ITV chairman Michael Grade were even scarier. “We estimate that September advertising revenue will be down 20%… and we have limited visibility on revenues beyond September.”
That’s corporate-ese for “we haven’t a clue what’s going to happen.” But it tells you all you need to know about how much uncertainty and fear there is in the business world about the outlook for the British economy.
It’s a similar story in the newspaper world. At the end of last week, Trinity Mirror reported that overall year-on-year revenues were down 15% in July. The worst of the damage was done in regional newspapers – which rely heavily on classified advertising – which saw a 17% annualised drop in revenue. But the nationals weren’t spared – they suffered a 13% fall, twice the rate of decline recorded in the first half of the year.
Source: The First Sector to Feel the Pain as Recession Grips
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David Stevenson joined MoneyWeek as Associate Editor in May 2008. Having started a career in the City with Morgan Grenfell, David joined Oppenheimer as a fund manager in 1983, starting on the UK desk before managing the European fund in 1986. He has subsequently managed equity portfolios for Hill Samuel, Cigna and Lloyds TSB subsidiary IAI International, and has worked as an analyst for stockbroker BNP Securities. After a brief period running his own business, David then returned to the financial world in 2007 as investment writer for the Motley Fool.