Today I am outlining why I believe that Royal Mail Group (LSE: RMG) still offers great value for money for those seeking excellent earnings growth.
Primed to post steady earnings growth
Shares in Royal Mail have exploded since flotation back in mid-October, gaining more than 67% in little over a month from a launch price of 330p per share. Still, in my opinion the company is still a relatively cheap sector pick, and currently trades on a P/E multiple of 12.3 for the year ending March 2014.
To put this in perspective, the reading for Britain’s marque postal service is comfortably below a prospective average of 18.4 for its industrial transportation rivals. And the company’s multiple moves adjacent to the bang-for-your-buck benchmark of 10 for next year, at 10.9, underlying Royal Mail’s credentials as a great value pick.
Indeed, Royal Mail is expected by City number crunchers to punch earnings of 45p per share for 2014, an 8% on-year increase. Growth is then expected to hit double-digit territory the following year, with a 13% rise to 50.8p per share.
Of course, the horizon for Royal Mail is not exactly flawless, and the company still faces the prospect of crippling strike action in the near future. Planned industrial action for 4 November was called off after the Communication Workers Union (CWU) said that discussions over wages pensions and certain legal guarantees were making progress.
Still, Royal Mail has been subject to strikes in recent years, and the potential for fresh action is very much real, particularly given continuing ire over the firm’s privatisation.
But Royal Mail has a number of critical, and indeed earnings-busting, factors in its favour. Most notably, the firm has a stranglehold on the distribution of letters in the UK — what’s easier than slipping an envelope into the postbox at the end of the road, after all? — while it is also the largest single player on the domestic parcel market.
With the company having forked out billions of pounds in recent years to update its infrastructure, I believe that Royal Mail is in great shape to benefit from the inevitable rise in postal traffic in coming years.
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> Royston does not own shares in Royal Mail Group.