Technology change impact - Pearson and Royal Mail

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

Post Date: January 19, 2017

Group description:	Our group is interested in sustainable investing and our goal is to identify and evaluate businesses that will thrive through innovation and their transition to a ‘One Planet Economy’. By leveraging the skills of group members, we aim to deeply understand these businesses, particularly focusing on how they develop long-term valuable benefits for their customers. Each year, we plan to evaluate around seven businesses to identify opportunities where our valuation exceeds the market price. A successful outcome is defined as achieving a compound annual growth rate (CAGR), including dividends, of 10% over a decade.
Meeting Type/Venue:	Meetings are in-person in a pub near to Waterloo station in London.
Meeting Frequency/Timing:	Meetings are bi-monthly on a Monday from 10:45am to 4:30pm. Members are expected to also pay for their own lunch which secures the group free use of a private room in the pub. The cost is expected to be £35-40 per person, per meeting, in addition to your SIGnet membership fee.

Group description:	SIGnet Taunton is a new group with around 10 keen members at present, with a range of investment styles and experience. We welcome new members.
Meeting Type/Venue:	In person meetings at a golf club near to the centre of Taunton.
Meeting Frequency/Timing:	We meet on the first Monday of every month at a golf club near to the centre of Taunton, 11am until 3pm with a lunch break.

Group description:	An online group for those who are new to investing, or have only been investing for a few years. Including topics such as: – What is a share or a bond, why and how to buy them. – Comparing funds, unit trusts, Investment trusts and exchange traded funds. – Portfolio management and diversification. – ISAs, pensions, SIPPS and how to save tax. – How terms such as PE ratio and dividend yield are used to value a share. – How to use technical analysis or charting.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Monday of the month at 7:00pm.

Group description:	An online group for those who already have some experience in investing. Covering topics such as finding companies to invest in, financial statements and ratios, valuation / margin of safety, analysis of companies and investment trusts and exchange traded funds.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Wednesday of the month at 7:00pm.

Group description:	The Equity Income Group welcomes investors of all levels of experience, from beginners to advanced. The focus of meetings is on dividend paying Investment Trusts, though there is also discussion around individual shares.
Meeting Type/Venue:	Meetings are held online.
Meeting Frequency/Timing:	Meetings are held every 6 weeks on a weekday between 7 and 8:30pm.

Group description:	A welcoming group open to all types of investors. Typical meeting content is to have a deep dive presentation on a topic selected by the participants and a session on buy/ sell/ key lessons learnt last month.
Meeting Type/Venue:	In person at a friendly pub close to Piccadilly Circus
Meeting Frequency/Timing:	Monthly during the evening on the first Wednesday of the month.

Group description:	All levels of experience welcome. A typical meeting agenda includes: – Macro Environment – Trades: Members review existing positions and identify securities with promising TA entry patterns or setups and with suitable risk/reward. Any security, long, short, futures, options may be considered. The convener takes actual positions in trades and maintains his own detailed ledger, accurately measuring performance of individual securities and cumulative activity. Members are notified by e-mail prior to the entries or exits that are decided upon. Following each meeting an updated copy of the ledger is circulated together with the next meeting agenda. Members may wish to maintain similar ledgers of their own but there is no obligation to do so. – Technical Analysis: Techniques and systems used in trades. Members can request discussion of particular aspects of TA.
Meeting Type/Venue:	Online via Zoom
Meeting Frequency/Timing:	The first Tuesday of every month from 7 to 9pm

Group description:	Open to all investors / people with an interest in investing. Typical meeting will involve members talking about recent purchases, successes, failures and possible future purchases. Also with occasional visiting speakers or members making presentations on a topic of interest.
Meeting Type/Venue:	We aim to meet on the last Tuesday of each month in a private room at a pub in Playhatch. Start time 7pm with members encouraged to meet up around 6pm for a bite to eat / drink before hand, if their diaries allow.
Meeting Frequency/Timing:	7pm on the last Tuesday of the month. Meetings likely to last about two hours but with informal ‘overspill’ before / after.

Group description:	Our group covers a wide spectrum of mainly stock market investing and trading from equities – which include shares, ETF’s Investment and Unit Trusts. We normally rotate the meeting chairperson (responsible for creating, with member’s help, suitable agendas) and a meeting presenter (members take it in turns to provide a 15 to 45 minute presentation on a subject of their choice). Various investing topics of interest are regularly discussed such as software, brokers, investing categories and markets and any related topics of interest.
Meeting Type/Venue:	Meetings will be returning to in-person in a private room at a West London golf club, close to an underground station. In the meantime monthly video calls and an in-between meeting email group will continue.
Meeting Frequency/Timing:	In-person meetings will be held on the second Wednesday of each month in the afternoons, following a golf club one course lunch.

Technology change impact – Pearson and Royal Mail