What’s next for the Royal Mail share price?

The Royal Mail share price fell yesterday after releasing its trading update. Is now the time to buy? This Fool takes a closer look.

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The Royal Mail (LSE: RMG) share price fell yesterday after it released a quarterly trading update. But it seems to have rebounded today. The stock is still up over 55% since the beginning of the 2021 and has increased more than 195% during the past 12 months.

So what’s next for the Royal Mail share price? Well, despite yesterday’s blip, I reckon the stock could push higher. In my opinion, the trading update was a reality check for investors. And I don’t think it was all that bad. I’d snap up some shares.

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Parcel boom

What has been driving the Royal Mail share price is the parcel boom. It’s no surprise that during the pandemic many people were ordering online. So this meant that that 2020 was an exceptional year for parcel deliveries. At one point, the company said that parcel volume had overtaken letters.

So the market had become used to this being the driving force behind Royal Mail’s transformation. Even the slightest negative news on this front was likely to hit the stock. And that’s exactly what happened yesterday. There has been a slowdown.

Royal Mail’s parcel volume for the three months ended June 2021 fell by 13% compared to the same period last year. I’m not surprised by this. As I said, 2020 was an extraordinary time. Now that the UK economy has re-opened, the number of parcel deliveries was naturally going to fall.

What’s encouraging is that when this is compared to same three months in 2019, the quarter’s performance has increased by 19%. Even Royal Mail has highlighted that it’s “starting to see evidence that the domestic parcel market is re-basing to a higher level than pre-pandemic, as consumers continue to shop online”.

Bright side

But it’s not all doom and gloom. There’s a bright side. Parcel revenues have held up during the quarter, increasing by 3.4% compared to the same period in 2020 and rising by 36.2% versus 2019.

It appears that while there has been a drop in parcel volumes, the general direction is positive. So far, the company still looks as if it’s emerging from the pandemic in a stronger position.

The FTSE 100 firm continues to make good progress with its employees and union members. And it remains on track to deliver £110m of non-staff savings. It’s introducing new products and services to meet customer demands such as the roll-out of parcel deliveries on Sundays. The company is doing the right things and I’m confident the Royal Mail share price can rise further.

Risks

Of course the stock does come with risks. Parcel volumes could continue to fall, which could impact the shares. The level of online shopping, especially after Covid-19 remains key to Royal Mail’s success. The company also faces fierce competition and it will need to maintain the progress it has made so far.

My view

I’m not really concerned about the slowdown. I think this was inevitable as lockdown measures were eased. In my opinion, the company has come leaps and bounds from its pre-pandemic days. And with the Royal Mail share price trading at a price-to-earnings (P/E) ratio of 10 times, I’d snap up the stock today.

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Nadia Yaqub 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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