While a number of FTSE 250 stocks have seen their market valuations decline over recent months, Royal Mail’s (LSE: RMG) performance has been exceptionally poor. The stock has become increasingly unpopular among investors following a profit warning, with political risk also weighing on its investment performance.
As such, it is down by 52% since May 2018. Although this suggests that investors continue to be worried about its future prospects, there could be scope for a turnaround. Alongside another declining stock which reported positive news on Monday, Royal Mail could be worth buying for the long term, in my opinion.
Growth potential
The company in question is TI Fluid Systems (LSE: TFS). The manufacturer of highly engineered automotive fluid storage, carrying and delivery systems for light vehicles released a trading statement for the 2018 financial year. It expects its financial performance to be in line with previous expectations, with revenue due to be €3.5bn. This is forecast to be 3% in excess of the growth rate in global light vehicle production for the year.
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As expected, the company’s 2018 adjusted operating margin is due to be in line with that of 2017. It remains optimistic regarding future growth, with it forecast to post a rise in net profit of 8% in the current year.
Following a share price decline of 33% in the last year, TI Fluid Systems now trades on a price-to-earnings growth (PEG) ratio of 1.1. This indicates that it offers a margin of safety and may be well-placed to deliver a turnaround. Although it may be an unstable period for the business, with it also announcing the resignation of its CFO alongside its trading update, in the long run it could offer capital growth potential.
Turnaround opportunity
As ever, buying a stock after a large fall in its market value may be a risky move. After all, in Royal Mail’s case, investors seem to be downbeat about its prospects. It faces the ongoing threat of nationalisation should there be a change in government. It also expects demand for its services to change, with its letters division in a constant state of decline. And while its parcels segment may offset this to some extent as online shopping growth remains buoyant, it could prove to be a painful transition.
However, with Royal Mail now having a price-to-earnings (P/E) ratio of around 8, it could be a worthwhile value investing opportunity. The stock has a dividend yield of 8.2%. Since dividend payments are expected to be covered 1.6 times by profit this year and earnings are forecast to grow by 2% next year, its dividend affordability appears to be high.
As such, there could be an income and value investing opportunity on offer. Earnings growth may prove to be elusive for the company as its industry experiences further changes. But with scope for improved efficiency and growth outside of the UK, it could prove to be a sound recovery stock in the long run.
