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This share’s 100%+ rebound may just be the beginning. Here’s what I’d do now

Education technology and resources company RM (LSE: RM) saw its share price collapse by around 60% when the coronavirus hit. But, in hindsight, that’s no surprise because the UK government had ordered all schools and colleges to close for an indeterminate period along with the cancellation of examinations.

At the time, RM said closures of that scale, along with international shut-downs and travel restrictions, would “inevitably impact trading.” So the company cancelled the full-year shareholder dividend payment for 2019.

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The shares and the business are bouncing back

What is perhaps more of a surprise is the remarkable come-back the shares have staged. After touching a low close to 110p near 24 March, the price bounced all the way back to around 270p on 16 June. That represents a return of about 145% for anyone lucky or prescient enough to have bought the shares at the bottom.

However, perhaps there were clues in the firm’s record of trading about the potential for a strong bounce. Prior to the crisis, revenue and earnings had been generally rising over a five-year period. And there had been strong annual advances in the dividend. Indeed, RM looked like it had command of a strong niche within a resilient sector.

But today’s interim results report reveals to us how badly the lock-downs affected RM’s trading figures. In the six months to 31 May, revenue declined by 17% year-on-year and adjusted diluted earnings per share plunged by almost 65%. Naturally, the directors have decided not to pay an interim dividend this year.

Although Q1 delivered a positive result, the figures were pulled down in Q2 as the crisis affected trading. However, the company tells us in the report turnover has begun to improve because education systems are beginning to reopen. Chief executive David Brooks said: “RM will look to play a key role in helping our customers’ transition to new ways of working.

A positive long-term outlook

Looking ahead, in a world featuring Covid-19, the directors reckon the demand for RM’s products and services “is difficult to predict.” It seems clear that revenues and earnings will be well down for the current trading year to November.

But City analysts have also marked down anticipated turnover by around 14% for 2021, compared to those achieved in 2019 before the crisis. And they’ve pencilled in earnings about 40% lower.

Meanwhile, the share price at today’s 232p is around 20% below its level at the beginning of the year. And that throws up a forward-looking earnings multiple of almost 15 for the trading year to November 2021. That rating is higher than the 10 or so I’m used to seeing and appears to factor in full trading recovery for RM.

Through the ongoing crisis, RM plans to be flexible in managing its costs and will keep operating models “under continuous review.” The long-term outlook is positive. And I reckon the firm’s operations will recover and grow over time. Right now, I’m watching the stock closely.  

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Kevin Godbold has no position in any share 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.