Politicians and pundits continue to debate whether Royal Mail (RMG), at 330p a share, was privatised too cheaply in October 2013. But the course of the group's share price last year - it peaked at 618p but now hovers close to 450p - tells another, more interesting story.
The mail market is suffering from severe overcapacity as a number of niche businesses have started to offer cut-price parcel delivery to Britain's biggest retailers. This leaves Royal Mail making do with low-margin - and in many far-flung postcodes unprofitable - letters work.
Royal Mail's management went so far as to lodge a complaint with Ofcom, claiming it would struggle to meet profitability targets in the future under the existing terms of its universal service obligation. But the regulator dealt Royal Mail a blow in early December by rejecting its concerns. Ofcom said increasing competition should act as an incentive for the company to become more efficient.
Sentiment towards Royal Mail's shares has been poor over the last 12 months. Their price has fallen by nearly a quarter since we advised offloading them last April at a price of 565p.
But industrial transport isn't limited to mail services: the sector also includes aviation and marine companies which provide London investors with exposure to economic trends on a global scale. Shares in global aviation services company BBA Aviation (BBA) staged a recovery last year after trading in the key US market picked up. Group revenues rose 3 per cent in the first half as acquisitions helped offset the disposal of the APPH landing-gear business and tepid trading in aftermarket services.
Marines services company James Fisher (FSJ) has a strong foothold in several niche global markets, and its shares typically trade at a premium to peers as a result. But currency fluctuations caused a headache in the first half of last year. Its marine support division took a £1m hit to profits, even as stronger performances from the offshore oil and specialist technical divisions pushed underlying operating profits up 10 per cent to £24m.
| Name | Price (p) | Market value (£m) | PE Ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| BBA Aviation | 354 | 1,660 | 19.5 | 2.7 | 14.2 | Hold, 305p, 6 August 2014 |
| Fisher (James) & Sons | 1,068 | 536 | 15.2 | 1.9 | -22.4 | Hold, 1,400p, 29 August 2014 |
| Royal Mail | 431 | 4,305 | 16.7 | 5.2 | -28.3 | Sell, 448p, 19 November 2014 |
Favourites
James Fisher offers the most compelling growth story, given its exposure to a wide variety of niche markets. One worry is a slide in the oil price, which could jeapordise some of its long-standing contracts in the offshore oil industry. Meanwhile, economists expect the US to drive global growth this year, which should play to the strengths of BBA Aviation.
Outsiders
We think it unlikely that trading conditions will improve for Royal Mail any time soon. As the number of online shoppers grows, so will demand for quick and specialised delivery services. Royal Mail simply doesn't have the focus to take on this extra responsibility. Its margins seem likely to come under further pressure this year as its rivals continue to snatch market share.
