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Are Falls In DX (Group) plc (-75%) & UK Mail Group plc (-18%) Overdone? Or Is Royal Mail plc Showing Its Dominance?

There doesn’t seem to be a day that goes by without a listed company serving up a profit warning. It is often the case that these warnings are negative in nature – so an earnings miss, rather than the altogether more positive earnings smash, leaves holders of the shares wondering whether to ditch their holding on the bell, double down, or just hold on for dear life.

The falls can range from anything from a 10% loss to sometimes 20%, 30% or even 40% if it’s perceived to be a bad one, or if the company shares are quite illiquid. Sometimes this can create an opportunity for the eagle-eyed investors amongst us. Whether that be in the form of picking up some shares on the cheap, or simply hoping for a dead-cat bounce, there are opportunities out there – it’s just a matter of spotting them.

So when I saw DX Group (LSE: DX), a share that I’d previously held, drop by over 75% in a day following a profit warning, closely followed by UK Mail (LSE: UKM) dropping further on a rather gloomy-sounding outlook that accompanied the interim results a few days later, I felt compelled to take a deeper look.

I didn’t see that cliff!

As you can see from the below chart, DX Group’s share price does look to have fallen off a cliff, such was the scale of the sell-off when the news was broken to the market at 10:51 on Friday 13 November.

And while there were some who may have dabbled on the day, I did wonder what the market knew that I didn’t. Since the announcement, the shares seemed to have settled around 20p-22p. This rates the shares at a rather lowly 3x forecast earnings and expected to yield over 10% – that seems very cheap, but are they cheap for a reason?

It may be that the market is less than impressed with management. You see, it was only on 21 September that the CEO’s outlook stated:

“Looking forward, our OneDX programme remains a key focus and we have a solid strategy supported by a robust balance sheet. Trading conditions continue to be tough but we are well placed to take advantage of any improvement and we have started the year in a positive manner.  The Board remains confident of our strategy to deliver long term growth.”

Less than 8 weeks later there was a profit warning, which seemed mainly due to higher-than-expected volume attrition in the highly profitable area of the secure DX Post and the slower-than-expected contract wins elsewhere. Additionally, management announced that the dividend would be reduced to 2.5p for the full year ending 2016 – less than half that paid in 2015.

Sorting out the issues?

Adding to investors’ pain five days later were interims from UK Mail. The shares had been sliding since the company warned on profits on 7 August 2015, the issues being mainly related to the transition to its fully automated hub in Coventry.

The market didn’t like management’s update, which pointed to guidance for 2016 being lowered, again due to the teething trouble at the new hub.

All in, the shares trade on a rather warm 16 times forecast earnings, though they are expected to yield over 6% — a yield not to be sniffed at.

However, I’d like to see management get a grip of the issues at the new hub and see it working seamlessly before investing here.

Market dominance?

Then last Thursday, Royal Mail (LSE: RMG) reported the half-year results. Reading through, though, there was the expected fall in letter volumes as well as increased debt as more staff left under voluntary redundancy schemes. Management, however, sounded quite chirpy. Of particular note (for me at least) was:

“Royal Mail is winning new volumes from well-known ‘bricks & mortar’ retailers and e-retailers. New contracts include John Lewis, Waterstones, House of Fraser, The Book People, The Hut Group and ASOS. This follows the development and launch of a number of initiatives to support retailers. For example, in the fast growing clothing and footwear sector, our online returns portal gives e-retailers full visibility of returned items. The new portal is important in the world of e-retail, where returns growth is outpacing the rest of the market. We have extended our strategic partnership with Alibaba, linking Chinese exporters with UK online shoppers, and allowing them to supply goods for UK delivery much more quickly.”

I think that announcements like this have, in part, given rise to the recent 10%+ rise in the price of the shares. For me, the company needed to be rightsized in order to compete properly in an ever-changing, ultra-competitive market – I think this is happening, albeit slowly.

However, as can be seen by the contract wins, here we have a company with the infrastructure to deliver nationwide whilst still being able to compete on price. In time, if not already, I can see it giving its smaller peers a run for their money.

And for those patient investors amongst you, it pays a near 5% yield while you wait!

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.