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Royal Mail shares are falling: should I buy?

A Royal Mail GLS delivery man
Image source: GLS

Royal Mail (LSE: RMG) shares had a knockout 2020. Although the pandemic did cause a slight drop, the shares finished 45% higher at the end of the year. What’s more, the share price has risen a whopping 186% over the past year, making it one of the FTSE 100’s top performers.

Recently, this momentum seems to have slowed, with the share price dropping almost 20% in the past 90 days. However, does this present the perfect buying opportunity for me with Royal Mail shares? Let’s take a closer look.

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Pandemic gold mine

The pandemic forced us to stay at home and online shopping went through the roof as a consequence. Therefore, it’s obvious to see why Royal Mail shares shot up at the tail end of 2020. Moving out of the pandemic, this will inevitably slow down, however, many online spending habits will likely stay. JP Morgan has highlighted this, reporting that e-commerce accounted for 16% of all US sales in 2020. In the UK it’s even larger, with the ONS reporting a 26.4% figure for July 2021. That’s almost 7% higher than the UK’s pre-pandemic levels. Royal Mail shares are in a good position to benefit from this in the long term.

In addition to this, a cost-cutting plan was put into place during the pandemic. Although this led to 2,000 job cuts, it has streamlined the company and helped drive higher profits. The £130m in savings will help the firm move towards a more automated future – something competitors are already doing.

It has been acknowledged that previous management was too slow in the move to automation. Royal Mail currently operates 20 automated parcel sorting machines, but this number is expected to rise with interim executive chairman Keith Williams saying that the firm “needs a quicker change of pace”. I think these changes are necessary if the firm wants to remain a frontrunner in its field.

Risks for Royal Mail shares

An obvious concern for Royal Mail shares is the post-pandemic slowdown in parcel volumes. In its 2021 Q1 reports, it highlighted that parcel volumes have already decreased 13% compared to Q1 2020. I expect this to continue throughout the back end of this year. Royal Mail’s thin profit margins place it in a vulnerable position if this is the case.

In addition to this, the pandemic is still looming. Due to the ‘hands-on’ nature of the business, staff could continue to be affected by self-isolation problems. This will increase costs and reduce profits for the firm.

Yet the firm seems to have positioned itself well for the future, even if the automated infrastructure is being implemented a little late. Personally, I like the look of Royal Mail shares as an addition to my portfolio for the long term. However, I would wait to see how the share price pans out in the coming months before I consider buying.

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Dylan Hood 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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