Written by: Laua Hoy | Hargreaves Lansdown
- Three companies with the potential to rebound
- Meta’s trove of customer data should hold it in good stead
- Royal Mail is making progress with unions
- Tate & Lyle refocuses on higher growth areas
Stock market uncertainty is rife, as geopolitical tension and worries about inflation weigh on sentiment. Bargain hunters have started sniffing around some of the market’s beaten down stocks, but are there truly any undervalued diamonds in the rough? It’s unusual for a stock to be lowly valued for no reason. The market tends to price in risk. But there are some companies with compelling turnaround potential that are worth a closer look.
“Facebook parent Meta is valued near all-time lows following lacklustre fourth quarter results. Revenue growth of 20% was more than offset by rising costs, and operating income fell 1%. More concerning was management’s forecast for growth to slow considerably in the year ahead.
The market’s reaction might have been too harsh. The company runs the largest social media group in the world. It has access to a wide range of customer information that advertisers need and that should hold it in good stead.
Meta’s also sitting on a rather large pile of cash. Meta could use this to monetise its messaging services - an attractive opportunity.
Longer term, Meta seems focused on the metaverse, although there needs to be a clearer strategy before it can be counted as a positive.
The market is doubting Meta. But if management can find a way to better monetise video content and generate meaningful returns from messaging, Meta could find itself back on track.”
Royal Mail delivers change
“The pandemic offered Royal Mail an opportunity to supercharge its operations. The structural shift away from sending letters meant the group had to find a way to put parcels at the heart of its operations. So far, its progress has been impressive.
Just a few years ago, Royal Mail was sorting the vast majority of its parcels by hand. That’s an expensive and slow way of doing things which ate into margins. Fast-forward to this year and around half of the parcels that pass through Royal Mail are expected to be sorted automatically. This dramatically reduces costs and gives the business more flexibility.
The most important improvement is related to the management’s relationship with unions. Royal Mail’s largest outgoing is wages, so any meaningful efficiency improvements have to come with staff cuts and pay changes. The next step will be reducing management positions by around 700, a change that would save the group around £40m per year. But getting the unions to agree is a big ask.
The group’s also home to an international business, GLS. This part of Royal Mail has been a growth engine with 8% operating margins, compared to Royal Mail’s 3.7%.
Management’s been growing this arm steadily through small acquisitions, a strategy that’s kept demands on cash low. The diversity that comes from this side of Royal Mail is a strength. But it does expose the business to added risks from economic slowdowns in other economies.
The market’s not convinced that the group can pull off its efficiency drive. Shares change hands for just six times expected profits. There’s also an attractive yield on offer. But investors should keep in mind, if the Unions become disgruntled, Royal Mail’s plans will be thrown through a loop.”
Tate & Lyle’s sweet and sour recovery
“Food ingredients business Tate & Lyle’s namesake sugar brand is no longer a part of the company. The group’s now focused on things like sweeteners, thickeners and bulk commodities.
It’s recently embarked on a major strategic overhaul – selling off the least profitable parts of the business and refocusing on higher-growth areas. That’s expected to complete this Spring, bringing with it a £900m windfall, £500m of which has been earmarked for shareholders.
The disposal is more than a one-time benefit for shareholders though. The changes mean operating margins rise from 11.1% to 14.8%.
What’s left over from the sale will go on reducing debt. This is a good move, particularly with interest rates rising and debt becoming more expensive to service.
The group’s also in a good position to grow its presence in sugar-alternatives as a more health-minded public looks for ways to clean up its diet.
Ukraine’s a major exporter of corn, on which Tate & Lyle depends. Corn prices are now soaring, which has the potential to eat into margins if it continues. In the short term, the group’s previously agreed contracts should protect against too much disruption.
Tate & Lyle looks to be on the brink of a fully-fledged turnaround. As long as management can stay the course and use its new cash pile wisely, the group could be on track for impressive growth.”