The Royal Mail share price is up 158%! Should I buy the stock?

The Royal Mail share price could continue to rise in value as the company builds on the successes it’s had over the past 12 months.

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The Royal Mail (LSE: RMG) share price has jumped a staggering 158% over the past 12 months. This performance has erased much of the stock’s decline since its all-time high in May 2018. Back then, shares in the delivery group were changing hands at 631p. They fell to a low of 124p at the beginning of April 2020, before recovering rapidly to 450p today. 

As the company’s share price action over the past few years shows, the stock market can be a volatile and unpredictable place to invest. So, investing in the market certainly isn’t suitable for all. However, I’m comfortable with the level of uncertainty and volatility that comes with investing, and I’m interested in the Royal Mail share price after its recent performance. 

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A change in fortunes

The first thing I do when I start taking a closer look at a business is try to understand how the organisation got to the position it’s in today. When it comes to Royal Mail, the company struggled for the past few years with declining letter volumes and rising costs. But the pandemic changed the group’s outlook entirely.

With consumers confined to their homes, online retail has boomed, and Royal Mail has risen to the challenge. It’s hired thousands of new workers, introduced new specialist parcel post boxes, a new parcel pickup service, and changed the way consumers pay for parcels, so there’s no longer any need to visit a Post Office

These changes, coupled with the tailwind from the pandemic, have helped the firm reach new heights. Last week, the company said it expected full-year 2021 adjusted profit to be “well in excess” of £500m after a substantial rise in parcel revenues over the Christmas period. Group revenue for the nine months to December rose 20% to £9.3bn.

This is a terrific transformation for the group, which reported a net income of just £161m for its 2020 financial year. 

Royal Mail share price return

Looking at the above figures, it’s clear why the Royal Mail share price has performed so well over the past 12 months. If the company can keep this up, I think the stock could be an attractive acquisition at current levels. 

However, there’s no guarantee this boom will last. Parcel volumes have benefited from lockdowns. So, when the economy begins to open up again, it seems likely volumes will decline as consumers return to stores.

At the same time, the company has a history of poor relations with workers. It has also struggled to keep costs under control. All of these factors imply Royal Mail’s good fortune may not last. Other companies have also been growing their parcel businesses over the past 12 months. This suggests the group may face increased competition. 

Still, while the business does face challenges, I think the Royal Mail share price looks attractive. That’s why I’d buy the stock today. If the group can build on its success over the past year, I think it could see continued earnings growth. 

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Rupert Hargreaves 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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