2 Reasons To Give Royal Mail PLC The Sack

Royston Wild looks at why Royal Mail plc (LON: RMG) may not be a star stock selection after all.

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In recent days I have looked at why I believe Royal Mail (LSE: RMG) looks poised to post terrific earnings growth (the original article can be viewed here).

But, of course, the world of investing is never a black and white business — it take a variety of views to make a market, and the actual stock price is the only indisputable factor. With this in mind I have laid out the key factors which could, in fact, push Royal Mail’s share price through the floor.

Parcels market becoming more competitive

Royal Mail has proven itself to be extremely savvy in turbocharging earnings from the parcels market. Although volumes remained flat during March-December, the company’s decision to switch to a size-based approach helped drive turnover 8% higher.

The recently privatised firm is comfortably Britain’s biggest parcel courier, while its GLS package division is also making waves on the continent. However, investors should be aware of the massive strides which the competition is making both at home and abroad.royal mail

TNT Post UK — Royal Mail’s biggest rival in Britain — entered the end-to-end market in West London in April 2012 and has ambitious plans to expand here. The company intends to double its workforce in the capital to 2,000 by the end of 2014, implemented as part of its wider plan to serve the entire country from collection to delivery by 2015.

At the same time, structural changes in the way people communicate continues to weigh heavily on Royal Mail’s letters business — the courier noted in January’s interims that a 5% decline in addressed letter volumes during the first nine months of 2013 contributed to a 3% drop in revenues.

Although the company is undergoing massive structural changes to latch onto the more lucrative parcel business and lessen its exposure to the eroding letters market, Royal Mail still sources almost half of group revenues from the latter area. So any drop in parcel activity looking ahead is likely to weigh heavily on group earnings.

Restructuring work set to linger

TNT Post has also given Royal Mail a headache in recent weeks by referring the company to regulator Ofcom over its plans to increase charges for its wholesale mail contracts. The inflation-busting rises are due to come into effect from the end of March.

Royal Mail argues that the changes “are an important part of [our] commercial response to both changing market conditions and to Ofcom’s comments,” which the Royal Mail says gave it commercial freedom to make alterations in line with relevant market costs. But with wholesale mail responsible for a substantial chunk of mail volumes, any adverse decision by the regulator could significantly crimp future revenues.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in Royal Mail.

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