Should I buy this sinking FTSE 250 stock in June?
Shares prices across the FTSE 250 have sunk in May. London’s second tier share index has slumped as worries over the British economy — and more specifically how interest rate rises will crimp GDP growth — have intensified.
The index’s descent reflects its high concentration of UK-focused stocks. International Distributions Services (LSE:IDS) has been one of the biggest losers in the month to date. It’s down 21% since the start of May.
Trying to ‘catch a falling knife’ is extremely risky for investors. It may look like a share has bottomed out. And a company could seem to offer unmissable value following share price weakness. But buying on the dip like this can end up costing individuals a fortune.
So should I buy IDS shares today? Or is this a FTSE 250 stock I should avoid like the plague?
The logistics giant owns Royal Mail in the UK and the GLS courier service in Mainland Europe and North America. But it sources the majority of revenues (62%) from its British operations.
It’s logical, then, that the IDS share price has dropped as concerns over the domestic economy have ballooned. In tough times letters volumes can dry up and parcel traffic sink.
However, a tough trading environment is only one of the company’s problems. It’s also fighting several internal fires that threaten earnings in the near term and beyond.
Fresh strikes coming?
The first huge problem is an ongoing battle it has with the Communication Workers Union (CWU) over pay, jobs and workplace conditions. Strike action at Royal Mail in the last financial year (to March 2023) was one chief reason why it swung to an operating loss of £748m.
The parties stuck a deal last month to avert further industrial action, much to the relief of investors. But an imminent vote on the agreement by members was this week postponed by the union. Explaining its motives it claimed that Royal Mail “has not stepped back from their attacks in the workplace.”
Both sides are due to meet again on Tuesday. But with the CWU describing the negotiating environment as “toxic”, a resolution may not be coming soon.
Royal Mail isn’t just facing trouble with the union, either. It’s under investigation from Ofcom over missed delivery targets. And in March it was referred to the regulator on claims that it prioritises parcel delivery over letters. These probes could result in big fines being slapped on the business.
Clear leadership is needed to steer IDS through this troubled period. But this looks set to remain lacking. Chief executive Simon Thompson — who’s been in the job since January 2021 — is to step down in October. His replacement will be the company’s third permanent chief executive in just five years.
It’s not all bad news over at the firm. Its GLS overseas division has plenty of growth potential, and ongoing expansion is encouraging. Adjusted operating profit here actually rose 1.8% last year despite tough economic conditions.
But on balance I believe IDS shares should be avoided at all costs. Those troubles at Royal Mail could pull the company’s share price much, much lower.
The post Should I buy this sinking FTSE 250 stock in June? appeared first on The Motley Fool UK.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023