Despite experiencing share-price weakness in recent weeks, Royal Mail (LSE: RMG) has had a fantastic run since it listed in October 2013 at 330p. Since then it has hit a high of over 600p and now trades at 530p – a gain of 60% in around seven months. However, with the continued decline in popularity of sending letters, does Royal Mail have strong growth potential? If so, can it really be classed as a super growth play?
Clearly, emails have made a huge impact on the popularity of sending letters. However, what the internet has taken with one hand, it seems to have given back with other. That’s because the popularity of sending parcels is on the up (aided to a large degree by sales of items over the internet) and this seems to be where Royal Mail has the potential to grow its bottom-line.
Surprisingly Strong Growth Prospects
Although Royal Mail is often viewed as a utility by many investors (owing in large part to its relatively high yield), its growth forecasts over the next two years are very strong. For instance, Royal Mail is forecast to grow earnings per share (EPS) by 34% over the next year and by 17% the year after. This is an extremely high rate of growth and beats the vast majority of FTSE 100 stocks hands down. Although Royal Mail may have some utility-like qualities, its bottom-line growth potential appears to be in a different league.
An Attractive Valuation
Despite offering such strong growth prospects (and a yield of 4.3%), Royal Mail is surprisingly inexpensive. It currently trades on a price to earnings (P/E) ratio of just 12.7. This compares favourably to the FTSE 100’s P/E ratio of 13.3 and, moreover, when it is combined with the aforementioned forecast growth rate in EPS over the next two years, shows just how attractive shares in Royal Mail are at present.
With an annualised growth rate in EPS of 25% forecast over the next two years and a P/E of 12.7, Royal Mail currently has a price to earnings growth (PEG) ratio of just 0.5. This is very low (and attractive) and shows that, while it may not be the most exciting of companies in terms of the service it offers, it has clear growth potential and should be viewed as a super growth stock.
