Royal Mail (LSE: RMG) saw its share price surge 80% in the months after its flotation. Here are five ways it could still make investors even rich.
1) Exploiting the boom in online shopping
Britons spent record amounts online over Christmas. December’s 19.2% rise in internet purchases was the fastest increase in four years. Online trading now represents 18.6% of total non-food sales, up from 16.5% a year earlier. All of which is great news for investors in the Royal Mail, because its best bet for future growth is its parcels business. It sends a stonking 417,000 parcels every hour, accounting for 51% of total revenue. That proportion is likely to rise even further, as its letters business continues its inexorable decline, with volumes down 5% on a like-for-like basis.
2) Keeping the unions onside
Here’s a worry. While parcels revenues rose 8%, volumes were flat. Revenues only rose because Royal Mail hiked prices. In a competitive market, it can’t keep repeating that trick. Management blamed flat volumes on the threat of pre-Christmas strike action from the unions. Shippers moved their business elsewhere, they claimed, fearing disruption. Management has wisely placated the unions, handing them a generous 9.1% pay rise over three years and employee protection guarantees, in return for curbs on their right to strike. The question now is whether unions were to blame for disappointing parcel volumes, or whether growth expectations were overblown. If volumes are flat in a rising market, their competitors are clearly stealing a march. Another set of disappointing parcels figures could puncture the share price.
3) Expanding overseas
Royal Mail may need to look overseas to generate strong earnings growth. In the UK, it is obliged to offer a universal postal service, which ups its costs and regulatory obligations. It is also restricted to using the Post Office for its parcels business, excluding it from the fast-growing parcels drop-off market. The group is looking for faster growth opportunities in Europe, but this won’t be easy either, given the highly competitive parcel markets on the continent. GLS, its ground-based European parcels business, has performed well in Italy, France and emerging European markets. The only blot is the rising sub-contractor rates in Germany have ramped up costs. GLS’ revenues rose 6% and volumes 5%, however, a hopeful sign for the future.
4) Through hard work
The privatisation is in the past, even if the political fallout continues. Now management has to knuckle down to some pretty tough challenges. This is a labour-intensive business, with a large and expensive full-time workforce at around 150,000. Its IT infrastructure are in urgent need of upgrading. Size has given it a head start, but leaves it make it vulnerable to nippier competitors. But there are promising signs, including a forecast 31% rise in earnings per share in the year to December 2015. Then another 15% in the next 12 months. If these forecasts are correct, the investor rewards should follow.
5) Slowly
At 596p, Royal Mail’s share price has leapt 80% since its flotation at 330p, but that post-privatisation euphoria will never be repeated. It looks a little pricey today, trading at a forecast 17.5 times earnings for March. Worse, the yield has now slipped below 3%. Some brokers are jumping ship. Citi has just set a target price of 531p and labelled the stock a sell. I wouldn’t buy myself either, at today’s price. There must be faster ways to get rich from the FTSE 100.
