Can Royal Mail PLC Make £1 Billion Profit?

Will Royal Mail PLC (LON: RMG) be able to drive profits higher?

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Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at Royal Mail (LSE: RMG) to ascertain if it can make £1bn in profit. 

Have we been here before?

A great place to start assessing whether or not Royal Mail can make £1bn in profit is to look at the company’s historic performance. Unfortunately, as Royal Mail has only become a publicly traded company within the last six months, there is very little historic data available that will all me to review the company’s historic financial performance.

royal mailThat being said, there is some financial data available for the company and based on these numbers, it would appear that Royal Mail is unlikely to generate a profit of £1bn before the end of the decade.

Indeed, Royal Mail reported a pre-tax profit of only £324m for the financial year ending year ending March 2013. Nevertheless, Royal Mail’s pre-tax profit of £324m was a jump of 62% from 2012, which is an impressive increase, although these figures do not take into account the tax Royal Mail paid on profits. 

But what about the future?

As a new public company, Royal Mail’s management team has been working flat out during the past year to drive the company forward and impress new shareholders. In particular, the company has cut non-core jobs and increased shipping prices, fortunately, these self-help measures have come at a time when the demand for Royal Mail’s parcel services is rising.

What’s more, Royal Mail’s management continue to slash costs, recently revealing the company’s continued efficiency programme, which aims to achieve annualised cost savings of £50m upon completion.

Further, this programme is targeted at maintain customer service, while reducing costs as most of the cost savings will come from a reduction of the company’s management population. The programme is expected to benefit 2014-2015 results by £25m, however, a one-off charge relating to job cuts will cost the company £100m.

Still, Royal Mail’s management remain confident that the company can meet City earnings estimates for this year, which at present are forecasting a pre-tax profit of £478m for the financial year ending March 2014. What’s more, current City forecasts predict that Royal Mail’s pre-tax profit will jump 21% during 2015 to £580m, and then 11% during 2016 to £642m.

Foolish summary

All in all, Royal Mail’s profit is surging thanks to the company’s cost cutting drive and rising demand for the company’s services. However, Royal Mail still has a long way to go before it can reach my profit target.

So overall, I feel that Royal Mail cannot make £1bn in profit. 

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.

Rupert does not own any share mentioned within this article.

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