I wrote an article for this month’s ShareSoc Informer Newsletter that covered forecasts for the future. One of the aspects covered was the impact of technology on many companies and particularly the impact of the internet on many businesses that was happening right now, and hence forecasting for the short term was easy. Today (19/1/2017) and yesterday we had two great examples of how dangerous this can be for investors.
Royal Mail
Royal Mail Group (RMG) today announced some trading figures for the first nine months of the year. Overall revenue was flat, and letters posted were substantially down (by 6% in volume). Even the parcels businesses showed only 2% growth, i.e. not much better than inflation. The share price is down 24% at the time of writing at 425p. Royal Mail reported falls in advertising and business mail. Is that surprising when BT, for example, now charge you £1.90 for a paper bill?
I do recall reading the prospectus for the IPO back in 2013 and I was not particularly enthusiastic then although the IPO price was 330p so there has been a decent return if you take dividends into account. It certainly looked a business that was strategically challenged by the move to email as the primary business communication medium and the use of the internet in general – the latter has improved the parcels volumes to some extent but there is also a lot of competition in that market where BT has no monopoly.
Pearson
Pearson Group (PSON) issued a trading statement yesterday. The shares fell almost 30%. Revenue and operating profits were on target and dividends will be held for the year, but in future years the dividend will be “rebased” – and you know what that means – yes it will be reduced. The company noted a further unprecedented decline in Q4 2016 in their North American higher education courseware business and it is clear the market for educational books, particularly paper ones is rapidly declining. Even digital versions seem challenged as they are cutting prices on those – to quote: “reducing eBook rental prices by up to 50% across 2,000 titles”.
There are some upbeat comments in the announcement regarding the future, but this business looks to be in deep difficulties. Now I don’t hold either of the above companies, but I do hold some shares in Finsbury Growth & Income Trust (FGT: manager: Nick Train). To quote from my AGM report last February “Mr Train apologised for the dreadful loss of value in Pearson, due to his stupidity. But they have continued to add to their investment in the company. It’s bigger than any of its competitors and it has invested more in digital products than them”. So the share price of FGT fell 1% as a result of the Pearson fall. Let’s be thankful he did not hold more.
Pearson used to own the Financial Times but sold it recently. In addition they are looking to dispose of their holding in Penguin Random House. Newspapers face similar challenges to educational books of course – the internet becoming the channel of choice for distribution but customers unwilling to pay the traditional price and advertising revenue also drifting away.
It is not clear to me how the management at Pearson are tackling these trends in a way that is likely to be successful. Technology is changing the business environment very substantially and is the key problem. Here’s a good quote in today’s FT from Citi analyst Thomas Singlehurst: “They are guilty of not panicking early enough and not panicking enough”. There may be calls for management changes it seems.
For investors there is a simple message: invest in companies that will benefit from technology change not those likely to be challenged by it.
Roger Lawson