Fears over declining consumer spending and falling business activity as the UK adjusts to Brexit continues to depress the share price of Royal Mail (LSE: RMG) — the parcels giant is still dealing at a hefty discount to levels seen on the eve of June’s EU referendum.
I believe the market may be missing a trick here, however, and reckon a bubbly second quarter trading statement (due on Thursday 17 November) could provide the fuel for a positive re-rating.
Royal Mail printed resilient results for the quarter ending June, the company traversing significant competition and a low inflationary environment to print a 1% revenues advance. And the parcels play’s European GLS division gave cause for optimism, too — both volumes and revenues here shot 13% higher between April and June.
On top of this, Royal Mail’s ultra-low valuations certainly give room for a fresh share price advance, in my opinion.
The elder statesman of Britain’s couriers is expected to endure flatlining earnings in the year to March 2017. Still, this reading results in a mega-low P/E multiple of 11.7 times, some way below the FTSE 100 prospective average of 15 times.
And the bottom line is predicted to resume its upward path in the following 12-month period, with a 3% rise currently forecast by City brokers. This projection drives the earnings ratio to a delicious 11.4 times.
Royal Mail isn’t too shoddy a selection for dividend seekers, either. With massive restructuring seriously reducing the amount of capital seeping out of the firm, the full-year dividend is expected to keep charging higher, resulting in vast yields of 4.8% for 2017 and 5% for 2018.
Mobile master
At face value, telecoms titan Vodafone (LSE: VOD) may not have the same headroom to generate significant share price gains like Royal Mail.
Indeed, a predicted 32% earnings rise in the year to March 2017 results in a P/E ratio of 31 times. And an anticipated 18% rise in fiscal 2018 produces a multiple of 26.3 times.
However, I believe Vodafone’s clear earnings momentum — a charge supported by massive investment in its voice and data capabilities — merits this weighty premium. And I would expect a strong update on Tuesday, November 15th to give the mobile operator’s share price fresh fuel.
Vodafone announced in July that the sales recovery in Europe continued during April-June, with organic revenues edging 0.3% higher. And growing services demand in Africa, the Middle East and Asia Pacific continued to spark higher, too, up 7.7% from the corresponding 2015 quarter.
Should the company announce further frenzied demand for its services — the company saw the number of 4G customers on its books double during the first quarter, to 52.5m — I would expect investors to capitalise on recent share price weakness. Vodafone dipped to its cheapest since February in end-of-week business.
Furthermore, I believe Vodafone’s huge 6.1% dividend yield through to the close of next year gives plenty of reason for income chasers to take the plunge. The FTSE 100 average forward yield stands at a far more modest 3.5%.
