Most people wouldn’t buy shares in a company when the one thing it was famous for was dying out.
Yet the public clamoured to buy Royal Mail Group (LSE: RMG) when it was floated in September 2013, even though the writing is on the wall for its letters business, thanks to things like email.
Royal Mail’s Christmas trading update reported that addressed letter volumes fell 3% in the last nine months, although revenues held steady.
Management had expected an even bigger drop, of between 4% and 6%, and clearly so had investors, who were unruffled as the share price rose 3.5% in early trading.
Royal Mail pinned the better-than-expected letter volumes on the UK economic recovery. So there is still some life in letters.
Write Me A Letter
Today is a red letter day for Royal Mail, because it’s now clear that investors have accepted that letters will continue their decline, and are investing in the group for other reasons.
The big question is whether its parcels operation can thrive in the UK and beyond.
Royal Mail handled 120 million parcels in December, up 4% year-on-year (a good number of them mine, as, like millions of Britons, I did all my Christmas gift shopping on-line).
Flat Packed
Worryingly, parcel revenue performance was flat, however, as the highly-competitive market hits pricing power. At least that marked a slight improvement on the 1% decline in the first half of the year.
The 10% rise in Parcelforce Worldwide volumes was cheering, but again, management were concerned about pricing pressures.
Royal Mail is still king of the parcels market, the UK’s largest carrier with around 40% share. And although competition is tough, its sheer scale allows it to drive off smaller carriers such as Coventry-based City Link, which announced its closure on Christmas Day.
Return To Sender
There were encouraging signs elsewhere, notably as 8% revenue growth in both volumes AND revenues in its General Logistics Systems (GLS) business. Current investors won’t be in a rush to sell.
The Royal Mail share price is down nearly 30% in the last 12 months, but despite that discount I don’t see this stock as a particularly tempting buy.
Now that the initial flotation euphoria has died down, investors are getting a more clear-headed view of the scale of the challenge it faces conquering a tough parcels market.
Trading at 16.4 times earnings and yielding around 3%, Royal Mail doesn’t deliver the goods for me.
