The Royal Mail share price is plunging again. Here’s what you need to know

After a torrid few months, could Royal Mail plc (LON:RMG) still deliver for investors?

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When Rico Back was announced as the new chief executive of Royal Mail  (LSE: RMG) in April last year, the company’s shares were riding high at 560p, buoyed by a deal with its union on pay, productivity and pensions. I don’t suppose Mr Back thought for a moment he’d be issuing a profit warning within months, or that the company would be demoted from the FTSE 100 before the year was out. But that’s exactly what happened.

Today, it released its latest trading update, and its share price took another hit — opening 15% down on yesterday’s close. Here at the Motley Fool, we’ve been somewhat divided on the stock’s recovery prospects. In a bearish article at the weekend, Kevin Goldbold found it “hard … to imagine the business turning up in the future,” while Peter Stephens wrote bullishly about it as “a worthwhile value investing opportunity,” as recently as yesterday. Does today’s trading update clarify whether Royal Mail has what it takes to effect a turnaround?

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Recap

The profit warning last October was a shocker. UK productivity performance had been “significantly below plan,” and management slashed its guidance on cost savings for the current year to £100m from £230m. It said it expected operating profit to be between £500m and £550m. City number-crunchers calculated this would translate into a 40% collapse in earnings per share (EPS) to around 27p.

The market took little comfort from no further guidance downgrades in the company’s half-year results in November and was unimpressed by Mr Back subsequently buying almost £1m worth of shares at prices between 290p and 318p. The share price continued to slide.

More bad news

In today’s update, the company said its recent performance had been “broadly in line” with its expectations (a director euphemism for “a bit below”). Management narrowed its previous operating profit guidance towards the lower end of the range. It said it now expects between £500m and £530m.

The long-term structural decline in letter volumes continues to blight the group’s overall performance. Management expects a fall of 7% to 8% for the current financial year, which is worse than the medium-term projection of 4% to 6% it has been working to. Furthermore, it warned that volumes next year are also “likely to be outside our forecast medium-term range.”

Brighter spots

The UK parcels arm and the international Global Logistics Systems (GLS) business are the brighter spots of the group’s operations, delivering underlying revenue growth of 6% and 8%, respectively, over the past nine months.

However, it wasn’t all good news here. Management cautioned that “cost pressures in our European and US markets are continuing.” As a result, it expects to see slowing volume growth next year at GLS, with the focus on protecting margins.

Bottom line

At a current share price of 270p, Royal Mail trades on a P/E of 10. This really doesn’t look good value to me, and will look even worse, with analysts likely to take the red pen to their pre-update EPS forecast of 27p.

Due to part of the business being in structural decline and letter volumes ominously falling faster than projected, I believe a more radical, time-consuming and costly restructuring may be required. As such, not even a near 9% running dividend yield can tempt me to see the stock as anything other than one to avoid at this stage.

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G A Chester 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.

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 considered, so you should consider taking independent financial advice.

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