Can IDS shares turn their fortunes around this year?

One of the FTSE 350‘s biggest loser this year International Distribution Services (LSE: IDS). The stock lost more than 60% of its value at one point, but regained some of its losses by the end of the year. So, here’s why I think IDS stock can bounce back in 2023.

striking fact

Consumer discretionary spending takes a hit in 2022 due to high inflation and the cost of living crisis. This affects package delivery. In addition, discontent over below-inflation pay rises led to strike action across the country, and IDS’s Royal Mail was no exception.

To make matters worse, negotiations between management and the union have stalled. As a result, more industrial action can be expected this year unless a consensus can be found. This will not help the company’s top and bottom lines, which have experienced monumental declines.

The numbers so far have been heartening and painful as many of the attractive properties of IDS stock have disappeared.

For one, the lure of the company as a passive income stock has been eroded. This is because the cash flow and balance sheet can no longer support dividend payments. Moreover, it is not expected to turn a profit in the next year or two. Britain will also enter a long recession, which will dampen hopes of a quick rebound for the group’s top line.

Restructuring required?

This led to calls for CEO Simon Thompson to step down. If this happens, I can imagine IDS stock seeing a relief rally, as it will give investors hope for change. That said, there is still a lot of work to be done to improve the share price.

A massive restructuring of the loss-making Royal Mail division must be implemented, as the current business model makes it unprofitable due to rising labor costs. A possible spin-off for the GLS conglomerate’s international division could free up capital for the restructuring. However, this will reduce the value available to GLS shareholders. Therefore, the board must act decisively or risk the stock falling again.

Send value?

The current price multiple for IDS stock indicates a possible bid. But it is worth noting that this is a lagging indicator, which paints a false picture when considering the prospects of the future.

In its latest half-yearly report, the conglomerate stated that it does not expect to grow or generate positive free cash flow in the medium term.

And despite having a relatively healthy balance sheet, falling cash flow will be a concern as the business still has £872m of debt to pay off. If IDS remains unprofitable for an extended period of time, shareholders may be at risk of dilution or having to pay off debt at a higher cost.

Overall, there is potential to turn the stock price upside down, especially if restructuring takes place before further damage occurs. But German and Liberum has a ‘sell’ rating on the stock. And the lack of a clear path, the risk of prolonged unprofitability, and the current macroeconomic environment make it a very risky bet for me. I won’t buy it.