No sooner had I written about the nosedive in Royal Mail (LSE: RMG) shares, the price started ticking back up again. I just put it down to my usual lousy timing, but it headed south again when a Q3 update was delivered a week ago.
Guidance lowered
The company said its recent trading has been “broadly in line with our expectations.” But at the same time, it narrowed its full-year operating profit guidance to £500m-£530m, nearer the bottom end of its earlier guidance range of £500m-£550m.
Chief executive Rico Back told us that the Christmas trading period was busy, with Royal Mail carrying 10% more parcels compared to last year. Parcel volumes for the nine months to 23 December were also up 6%.
With electronic communications in the ascendency, he added that letter volumes for the full year are now expected to decline by 7-8%. That trend is pretty much certain to continue, with volumes falling faster than the 4-6% range the company had hoped for.
Weak year
I can’t help feeling that Royal Mail’s full-year results will damage what might look like a decent valuation. Analysts currently have the shares on a forward P/E of 10.5. But I’ll be very surprised if full-year EPS isn’t downgraded now and the P/E lifted. EPS is already barely covering forecast dividends, and I think a dividend cut is needed to help control costs.
The bottom line for me is that I think there are more attractive FTSE 250 shares out there, so I just don’t need to consider taking a risk with Royal Mail.
One example is Dixons Carphone (LSE: DC), which is also struggling with a collapsing share price. In fact, over the past two years, its shares have lost 57% of their value, compared to a less damaging 31% drop for Royal Mail.
If the retail slump wasn’t bad enough, the mobile phone business is very competitive. It’s been tough going, and Dixons’ earnings have been falling. From an EPS figure of 33.5p in 2017, analysts are forecasting a lowly 20p for the current year. The dividend also looks set to fall to 8p per share, from 11.25p last year.
Oversold
But I think the sell-off is overdone, and I see the current valuation of the shares as just too low, supported by the firm’s Christmas update.
In the 10 weeks to 5 January, UK and Ireland like-for-like revenue dropped by 7%. But against that, like-for-like electrical sales gained 2% and international sales gained 5%. Sales in Greece rose by 19%, with Nordics up 5%, and the firm said it was “gaining or holding share in all territories.”
The overall result is that sales are being maintained at a flat level. In the current retail climate, I think that’s fine. And it fits in with forecasts for the next couple of years, too.
With EPS expected to be maintained at around the 20p level, the shares are on P/E multiples of a little under seven. The reduced dividend would still yield an attractive 6% on the current share price and would be well covered by earnings.
Overall, I’m seeing an oversold stock and and opportunity to lock in a high dividend yield, if you don’t mind a little bit of risk.
