A look at developments in the financial markets over the last week or so.


Royal Mail Trading Update for the Nine Months Ended 28 December 2014
Royal Mail recently issued a trading update for the 9 months ending 28 Dec 2014, which covers the all-important Christmas period.


  • Dec parcel volume +4% year-on-year (yoy), with 120 million parcels delivered over the month
  • Group 9 month revenue +1% yoy
  • UK parcel volume +3% yoy, revenue flat
  • UK letter volume -3% yoy, revenue flat
  • GLS volume & revenue +8% yoy
  • Paddington site sale completed for £111 million
  • Full-year guidance reaffirmed

The market has been bearish since the company’s share price peaked above £6 last year. The update beat expectations, sending the share price up 4% on the day of the update. While the market continues to hold a negative view on Royal Mail due to its outdated technology, overcapacity in the UK parcel market, and its universal service obligation; not everything is bad. Briefly, here are some positive points on the company:

  • Its £4.4 billion market cap is underpinned by excess property worth up to £1 billion.
  • Royal Mail is still profitable and growing, albeit slowly. It produces strong cashflow and a solid dividend. It also owns GLS, a very successful European subsidiary. These points appear to be overlooked in some market commentary.
  • The company is by far the largest player in the UK letter and parcel market. While the market is suffering from overcapacity, Royal Mail is in a good position to survive in the short-term and grow in the long-term as the market rightsizes.
  • Technologically, the company is backwards. This is a negative unless you consider that, with almost none of the technology required by industrial and retailer parcel clients, Royal Mail is competing against firms that offer real-time tracking and interactive delivery technology. The company is upgrading its (sorting, administrativedelivery and partnership) capabilities using cash generated from operations and the sale of redundant sorting offices. What happens when it is able to offer the same technology as its competitors, combined with its scale of operations in the UK and abroad?
  • The company is aggressively cutting costs through technology, efficiencies and downsizing. This should allow it to compete effectively during the current price war. Is there an organisation with more scope for efficiency gains than a privatised government entity?
  • As a company with solid cashflow and minimal debt, Royal Mail is in a position to acquire competitors in the UK and abroad.

Royal Mail is a large, outdated organisation barely managing to compete with its smaller, more nimble competitors as it plays catchup in terms of technology. While there may be more attractive investments in the sector over the short-term, there are two questions to be considered over the longer-term:

  • Who is likely to withstand the current market overcapacity –
    • Small operators with limited access to capital that are already operating at maximum efficiency, or
    • A well-funded, competitive Royal Mail that continues to reduce costs and increase its capabilities?
  • Who is most likely to benefit from technological progression –
    • Cutting-edge firms that already have the latest services and lower costs built into their pricing, or
    • Royal Mail, which still sorts and delivers mail by hand and does not yet offer services such as real-time parcel tracking and interactive delivery options?

While a lot could go wrong between now and the time that Royal Mail competes on a level playing field with its competitors, there is a lot of scope for improvement within the company, both compared to the likes of DPD and Whistl, and given the fact that this is not a loss-making company being turned around. It competes now.

Blackstone Said in $1.7 Billion Deal to Buy Apartments
Already the largest owner of single-family houses in the US, Blackstone has expanded its real estate investments by purchasing $1.7 billion worth of apartment buildings. This is a reminder that real estate continues to offer attractive returns to institutional and retail investors, compared to fixed income asset classes like bonds and bank deposits.
Blackstones’ current stock price is $36, it holds almost $9/share in cash and investments and offers a 5% dividend yield.

Google to Sell Wireless Service in Deals With Sprint, T-Mobile
The move was met with mixed feelings – some commentators saw “Google Mobile” as a strong threat to existing network providers, while others were less concerned given the company’s track record with hardware sales and fibre optic rollout.

Target closes all 133 stores in Canada, gets creditor protection
Two weeks ago, Target announced it was pulling out of Canada – less than two years after entering the market. The company will close all 133 Canadian stores and has been granted creditor protection (unpaid creditors cannot seize assets). It will lay off over 17,000 employees. Sears Canada took advantage of the announcement by inviting Target employees to apply to them.
Target Canada has suffered a number of problems since opening, and operates at a loss. Management justified the withdrawal by stating that Canadian operations were unlikely to be profitable before 2021. While the announcement was seen by some as an admission of failure, shareholders sent the stock higher on the news.
Without having looked at the company’s strategy for entering Canada or why it failed, the language of the announcement was interesting. Consider the timelines mentioned:

  • Target gave up on Canada after two years.
  • Management decided eight years was too long to wait for additional profits from outside its home market (US).

These timelines raise a few questions about the company’s long-term strategic management.

  • Is management primarily focused on the short and medium-term, and the company’s share price?
  • Have management identified other long-term opportunities to deploy this capital?
  • The US is a saturated market. Canada is very similar to the US and so an obvious choice for US retailers looking for international expansion. If the company didn’t succeed here, will it be willing to try elsewhere in the future or will it double-down on the US and continue to compete for market share in an increasingly crowded space?
    • What does the above mean for long-term shareholder returns?

Target Canada’s closure leaves landlords with vacant real estate


A Dozen Things I’ve Learned from Joel Greenblatt about Value Investing
Tren Griffin’s latest blog post.
Joel Greenblatt is a very successful value investor and the founder of Gotham Capital, which offers four diversified long/short equity mutual funds. He has written several books on value investing identified in the notes below.

Draghi’s force multipliers
This article provides some context for the European Central Bank’s recently announced quantitative easing (QE) programme.
Most importantly, it’s worth asking the question “Why now? Why didn’t Draghi launch this program months ago?”. If your answer involves anything to do with “Germany” or politics, I think you’re in danger of missing the wood for the trees.

Will deflation leave us naked, homeless and hungry? Not everyone is convinced.
Mark Gilbert questions the conventional wisdom that deflation is bad.
I’m not smart enough (or perhaps stupid enough) to argue against economic orthodoxy; but the current backdrop of falling prices seems to be doing wonders for people’s optimism, rather than making them fearful of the future. In the U.S., consumer confidence jumped to its highest level for 11 years…
The blanket statement “deflation is bad” fails to take into account the reason for falling prices. Are US prices falling because of low consumer demand, or because of the significant drop in a primary economic resource – oil?

Long Reads

‘That’s Not All!’ Kevin Trudeau, The World’s Greatest Salesman, Makes One Last Pitch
An interesting read on the rise and fall of the “infomercial king”, New York Times best-seller, and motivational speaker. If you don’t remember Kevin Trudeau, you probably didn’t buy his Mega Memory course.

Why the Smart Reading Device of the Future May Be … Paper
A look at studies suggesting that reading from paper is better than reading from a screen.
A 2004 study found that students more fully remembered what they’d read on paper. Those results were echoed by an experiment that looked specifically at e-books, and another by psychologist Erik Wästlund at Sweden’s Karlstad University, who found that students learned better when reading from paper.


One thought on “Weekly market round-up: 26 January 2015

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