Two normally defensive UK Index blue-chips disappointed this week, their negative trading updates highlighting worrying business trends. The first’s shares sold off hard (-7%), while the other’s tanked (-28%) after its third profits warning since September. The question now is whether the worst is over for both? From near multi-year if not all-time lows are shares in Royal Mail (RMG) and publisher Pearson (PSON) primed to rebound? Can both overcome trends that have been anything but friendly? Could they today represent major recovery opportunities for those looking to buy low and sell high?

 Royal Mail’s 9-month trading update saw shares breach 430p rising support dating back to October 2014 all-time lows. The shares have since fallen another few percent to test 2016 lows of 413p. Results may have met consensus expectations, with a strong Christmas allowing reiteration of full year guidance. What they couldn’t do was mask the long-term decline in UK letter volumes – worsening on account of Brexit uncertainty – and ever tougher competition within parcels.

If anything the group did well to keep revenues flat, Europe delivering just enough volume and revenue growth to offset declines in the UK, where Parcels growth was unable to make up for continued weakness in Letters. Parcels competition is intensifying as we buy more and more online, encouraging new carriers to fight for market share. It might well be brave to suggest that “things can only get better”, hence the focus on costs to protect margins. However, things don’t necessarily have to get any worse. And that’s the key. With the shares -25% from last summer’s highs and just 5% from October 2014 all-time lows, they could still represent a profits rather than revenues recovery opportunity that can really deliver.

Pearson’s update, on the other hand, didn’t require any reading between the lines. Management withdraw 2018 profits guidance, revised 2017’s to below consensus and said it will rebase the dividend (6% yield!) after multiple disposals (FT, Economist and now Penguin) changed the company make-up after a shift from print to digital. US trading conditions for higher education have worsened markedly; enrolment is down and students are hiring rather than buying course material. Off their 8yr lows, some support has emerged. As with Royal Mail, the question now is whether things can at least not get any worse. Perhaps Trump will contribute to improvement in trends for US education and the shares follow suit.

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Enjoy your weekend!

Mike van Dulken, Head of Research, 20 Jan 2017