Thinking of buying the Royal Mail share price after its recent decline? Here’s what you need to know

Royal Mail plc (LON: RMG) could face a period of heightened uncertainty.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The prospects for the Royal Mail (LSE: RMG) share price may appear to be relatively uncertain at the present time. After all, the stock has declined in value by 32% in the last two months following the release of a profit warning. It showed that the company’s strategy is not having the results that had been expected, and a revised plan is due to be put in place.

In the long run, the company could have recovery potential. It now has a low valuation relative to the wider index. But is now the right time to buy the stock alongside another ‘falling knife’ which released an update on Wednesday?

Growth potential

The company in question is the manufacturer of high technology components and systems, Senior (LSE: SNR). It released a trading update which showed that it’s on track to deliver results which are in line with expectations for the full year. Its Aerospace division has benefitted from continued positive activity in the large commercial aircraft sector, with production ramping-up on newer programmes, such as the 737 MAX, A320neo and A350.

The company has continued to make progress on new product introductions on programmes won over the last year, and expects investment activity to continue into the first half of 2019. The construction of its new Aerospace facility is progressing well. Its Flexonics division also recorded trading for the period in line with expectations.

Looking ahead, Senior is forecast to post a rise in earnings of 9% in the current year, followed by further growth of 17% next year. This puts the stock on a price-to-earnings growth (PEG) ratio of 1.1, which suggests that it may have a wide margin of safety following its 22% decline in the last two months.

Recovery potential

As mentioned, Royal Mail has also experienced a challenging two-month period. In the near term, the company’s share price could come under further pressure, with its bottom line expected to decline by around 14% in the current year. This is significantly below previous guidance, and shows that the expected results of its efficiency drive have been lower than expected. And with investor sentiment being weak, there could be further falls in the company’s share price in the near term.

With a new CEO at the helm, a revised strategy is due to be put into action over the coming months. This could create a catalyst for improved financial performance in the long run, but may lead to a share price which drifts lower in the near term.

Following its share price fall, Royal Mail now trades on a price-to-earnings (P/E) ratio of around 8.4, which suggests it offers a wide margin of safety. Its long-term growth prospects could be boosted by rising demand for parcel delivery, as well as further investment in its international operations. Therefore, while potentially volatile in the near term, its long-term turnaround potential seems to be high, in my opinion.

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.

More on Investing Articles

Newspaper and direction sign with investment options
Investing Articles

When cheap markets meet favourable conditions, sentiment flips very quickly

London’s stock market is cheap — some sectors, even cheaper. Given a change in sentiment, the uprating could be substantial.

Read more »

Investing Articles

Empty Stocks and Shares ISA? I’d snap up these 3 stocks to start with!

Sumayya Mansoor explains how she would start to build wealth from scratch with an empty Stocks and Shares ISA and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

7.7% yield and going cheap! Why is this unknown FTSE 250 stock flying?

It's no household name, but there's one FTSE 250 stock with a high dividend yield and booming profits that looks…

Read more »

Photo of a man going through financial problems
Investing Articles

I’d stop staring at the Nvidia share price and buy this FTSE 100 stock instead

This writer reckons there is a smarter way to invest in Nvidia today without taking on stock-specific risk. Here is…

Read more »

Young lady working from home office during coronavirus pandemic.
Top Stocks

5 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Young Asian man drinking coffee at home and looking at his phone
Dividend Shares

These 3 FTSE 250 stocks offer me the highest dividend yields, but should I buy?

Jon Smith considers FTSE 250 shares with a very high yield, but questions whether the income is going to be…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Is FTSE 100 takeover target DS Smith a great buy?

A mega-merger between FTSE 100 giants DS Smith and Mondi has the City abuzz. But is there any value in…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

The WPP share price dips as profits fall. Here’s why it could be a top dividend buy

I'm starting to think the WPP share price undervalues the stock, especially if the long-term dividend outlook comes good.

Read more »