Why the Royal Mail share price could be about to soar

Royal Mail plc (LON: RMG) could outperform a wide range of index peers.

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In the last two months, the Royal Mail (LSE: RMG) share price has fallen by around 20%. At the same time, the FTSE 100’s price level has been relatively flat. Clearly, recent underperformance is disappointing for the company’s investors. But with a relatively low valuation and an improving business model, the company’s future outlook appears to be bright.

In fact, it has the potential to outperform the FTSE 100 in the long run. Alongside another cheap stock which reported positive results on Friday, now could be the perfect time to buy it.

Improving performance

Recent results released by Royal Mail showed improving performance from its key divisions. In the UK, the company recorded its strongest parcel volume growth for four years, while its letters performance was resilient in a tough market. With online shopping continuing to prove popular among consumers, there could be further volume growth ahead for the company’s parcels division.

Meanwhile, the international operations of the group, GLS, continue to offer strong growth. A mix of acquisitions and organic growth allowed the division to boost its adjusted operating profit by around 16% versus the prior year. This helped to partially offset a fall in profit from the UK, and in the long run the potential for international growth seems to be high.

With Royal Mail trading on a price-to-earnings (P/E) ratio of around 14, it seems to offer good value for money. Its dividend yield of around 5% suggests that it could offer income investing appeal, while earnings growth of 3% next year suggests that its cost avoidance strategy may be beginning to have a positive impact on its bottom line. As such, now could be the right time to buy it after its recent share price fall.

Growth potential

Also offering the potential to beat the FTSE 100 is recruitment specialist Hays (LSE: HAS). It reported an impressive quarterly performance on Friday, with net fees growing by 15% on a like-for-like (LFL) basis. This is a record for the company, with growth exceeding 10% in 24 of its 33 markets. As a result, full-year operating profit is expected to be marginally ahead of current consensus expectations.

Market conditions remain positive for the business. It continues to invest in key growth markets where it believes there are structural and market share opportunities. As a result, its impressive performance could be set to continue over the medium term – especially with the global economy having a positive outlook.

With Hays forecast to post a rise in earnings of 10% in the new financial year, investor sentiment could improve in the coming months. Its price-to-earnings growth (PEG) ratio of 1.8 indicates that there could be a wide margin of safety on offer. As a result, the stock appears to be worth buying now. While it could be volatile, its capital growth potential seems to be high.

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.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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