IG Group, a company that needs volatility?

IG Group has become one of the most successful spread betting companies in the UK, a market leader that sits in the FTSE250.  It hasn't got there by being an overvalued or ramped up growth company either, it has an undemanding P/E of 11.4 and offers a dividend yield of around 5.2%.  The share price has recently been in a slump, finding support at around the 420p level on the daily chart, but struggling once it gets to around the 460/70p level.  The 52 week high is just over the 500p level, but unlike other FTSE250 stocks that often steam away once past a resistance level, IG Group tends to fall off again, no doubt frustrating long term investors in the company.

There is something interesting about the company that is worth noting for anyone interested in buying it, especially long term buy and hold investors.  It seems to do better when there is volatility in the markets that its clients trade, when the markets are quiet, performance is affected.  This now seems to be a common theme with IG Group, which poses the question what will happen to the shares if the markets ever get back to some sort of normality?  A normality where there isn't the type of extreme volatility in market movements that have become the norm since 2007/8.  It would appear that spread betting traders like this volatility, even though most of them probably tend to lose because of it.


Here are some figures from IG this morning in their trading update.

Revenue in line with expectations, but 18% lower than the same period the year before.

Their major UK market saw revenue fall by 21%.

Number of active UK clients down 16%.

Revenue per client 6% lower.

Europe saw revenue fall 20%.

While the number of active clients in Europe rose 12%, revenue per client fell 28% y on y.

Australia, which had previously been booming, saw the number of active clients fall and revenue per client by 9%.

Active clients in Japan fell 32%, but revenue was up 9%

On the positive side the company concludes its statement as follows;

Outlook

The first quarter of any financial year is normally the lowest revenue quarter for IG, with the prior year an unusual exception to this. The group continues to face tough comparatives at the start of the second quarter, with September 2011 the second highest revenue month in the history of the company. The group anticipates that revenue this year will, as in most years, be weighted towards the second half.

In other words, they expect better things to come in the second half of the year when historically it would seem they make most of their money.  This, in one sense, is not unusual for a company that is basically a bookie.  Bookmakers often make more money at certain times of the year, but with IG it is difficult to make a full assessment on how they will fair going forward because of this apparent need for volatility.

Perhaps what they need are markets that are either very volatile, which attracts the action hungry type traders, or a raging bull or bear market where traders can at least make their one way bets with a degree of reasonable certainty and as IG would no doubt hope, trade with more regularity.  What IG and I suspect spread betting companies in general don't like is markets to be boring, quiet, range bound, lacking movement or action either way.  Traders and investors then tend to sit and wait for better opportunities.  It would seem that both IG and their client traders share the same desire, they want action.

Sources;

digitallook.com/IGG-Interim_Management_Statement
digitallook.com/NoRepeatOfRecordAugust