After tumbling steadily for almost two years, Royal Mail (LSE: RMG) finally found its footing late last year as the stock markets started recovering after last year’s market crash. It has not looked back since. The Royal Mail share price is now up by a huge 222% from last year.
#1. Robust financial performance
Underlying its share price performance is the improvement in its financials. This is the first reason I like the Royal Mail share. For the full year ending 28 March 2021, the company’s reported revenues rose by 16.6% driven by an increase in its parcels segment and GLS, its Amsterdam-based subsidiary. Its profit before tax rose by a whole 303% to £726m. And its net debt has also reduced.
#2. Making peace
Its share price performance had been affected earlier by the ongoing dispute between the company’s management and its strong trade-union. But at the end of last year, it was finally able to reach a deal, which removed a big source of uncertainty for the share price. This is the second reason I think the share is promising now. If the company is able to maintain its strong performance, I expect that its share price can rise more.
#3. Competitively priced
Even with the big increase so far, the share price is quite competitive at 9.5 times. This is way lower than that for many other high performing FTSE stocks. This is the third reason I like the company’s share. I reckon that as long as investor sentiment is positive, this can drive the Royal Mail share price higher. It also pays a dividend, though the yield is small at 1.7% at present.
Why I am cautious
However, I am cautious as well for two reasons.
One, the past year was an exceptional one. Royal Mail’s parcel business got a significant push from the lockdown. Or as the company puts in its latest results release, “Parcels, rather than letters, provided Royal Mail with the majority of its revenue for the first time in its five-century history”.
While some permanent shift to online shopping is likely to have occurred, with the lockdowns now eased, we will soon know by exactly how much. I think it is fair to expect some softening in the parcels business in this financial year. But for Royal Mail’s robust growth to continue, this change should not turn out just be a flash in the pan.
Two, the company itself is not entirely positive in its outlook. It says that uncertainties could impact its performance, though it does temper its caution by saying that there are “grounds for optimism”.
My takeaway
On the whole though, I think the Royal Mail share is attractive. When I had last written about it, I was looking for more evidence of improvement in underlying conditions, which has happened. If I want to be really cautious, I would wait for another couple of updates to see how it performs post-lockdown. If not, it is a buy for me.
