Royal Mail (LSE: RMG) has played a blinder this year. Since the start of 2021, we’ve seen a gain of around 45%, while the FTSE 100 has managed a mere 10%. And, going back over a full 12 months, Royal Mail shares have soared by around 140%.
That’s even after the price fell back from a high in June. At the peak, we were seeing a rise of 80% year-to-date, and 200% since August 2020. I’ve long hoped for a recovery for the Royal Mail share price, but I wasn’t expecting anything this big, this quick.
Covid-19 helped, directing a big increase in shopping by mail. And even if we’re allowed to go to the shops ourselves now, I reckon a fair proportion of that shift is going to stick with us. A lot of people ordering online for the first time found they really like the convenience.
The big question I ask myself is whether I’ve missed the recovery. Is it too late to get in now, or is there still more to come? Well, firstly, the bigger picture of the Royal Mail recovery doesn’t look quite the same as that narrow 12-month focus.
Though Royal Mail shares did peak at more than 600p earlier this year, they still haven’t regained their high point of May 2018. That was just before the big slump really set in.
Changed beast
Royal Mail today is a very different beast from a few years ago. We had been looking at a bit of a dinosaur, stuck in the past with outdated practices and under the cosh of heavy competition. For a time, unions weren’t too happy about the need to change, to slim down, and to improve efficiency. The threat of industrial action weighed heavily.
Thankfully, those days are gone. Royal Mail now, in my view, doesn’t face an extinction I previous saw looming. It is, however, in a highly competitive and low-margin business. Last year, the company recorded an operating profit margin of only 5.6%. That’s better than previous, but it still doesn’t provide a huge margin for safety.
Valuing Royal Mail shares
So what about valuation? If we go on figures for the year ended March, the current share price puts Royal Mail shares on a trailing P/E of less than 9.5. I’d see that as cheap, if I thought the same levels of profit were likely for the current year.
But I don’t see it. Yes, I think online selling, and therefore parcel deliveries, will remain strong. But surely not as strong as the year we had no alternative.
How will long-term volumes and profits shake out in a post-pandemic world? That, I think, is anybody’s guess right now. And it leads me to a dilemma. I see a much-improved company with solid long-term prospects. But I’ve only really seen it operating in one very exceptional year. I just can’t get a feel for a fair valuation for Royal Mail shares.
There’s too much uncertainty for me to buy right now. But with better clarity in the future, Royal Mail might well become a ‘buy’ candidate.
