The past year has been great for many stocks because the stock market rally that started in November 2020 has vastly improved their fortunes. But the mail and parcels delivery specialist Royal Mail (LSE: RMG) stands out among them for two reasons. One is that its share price has seen significantly higher gains than many others. If I had bought the stock last September, by now, I would have doubled my money. Two, with such rapid gains, its market capitalisation rose enough for it to re-enter the FTSE 100 index.
Strong growth for Royal Mail
There is little doubt that the company benefited from the pick-up in parcel delivery services as we stayed locked down for much of 2020 and well into 2021. Revenue earned from its parcel services outstripped that from letters for the first time last year. However, now that the pandemic has moderated and life has pretty much gone back to normal, the key question for me is: can Royal Mail can maintain its momentum?
So far, things appear to be going well for it. For the financial year so far (starting 1 April and up to the end of August), it reported an 8.2% increase in revenue from last year. Further, it has done even better compared to 2019, which is the last normal year before the pandemic. Its revenues are up 17.7% on a two-year comparison.
Profits expected to rise higher
Its outlook for the rest of the year is also encouraging. It expects adjusted operating profit for the first half of the year to be between £395m and £400m. The number should be even higher in the second half of the current financial year. Even if I assume that it will be exactly the same as that in the first half, we can expect around £800m in adjusted operating profit for the full year. This means that we are looking for at least a 14% increase from the £702m seen last year.
Parcel growth can slow down
There are potential stumbling blocks, of course. It says there is still “significant short-term uncertainty”. Also, the numbers for only July and August, which is the post-lockdown period, show a slowdown. Revenue has grown by only 4.5% during these two months, with a decline in parcels delivered by Royal Mail of 4.6% during this time. While the company chalks it up to a seasonally slow period, I think this indicator is worth watching. If it does not pick up even after the summer months, it could reflect a genuine downturn in parcel demand post-lockdown.
My takeaway for the Royal Mail share price
The long-term prospects for the company look good however, irrespective of any near-term risks. The company believes that some consumers may have permanently moved to online purchases after last year’s experience. Continued growth across the e-commerce ecosystem, including that for retailers and packaging providers, also supports this idea.
Based on this, I agree that it does have good growth potential over the long term. So, I have doubts about whether the Royal Mail share price can continue to grow at the same pace as last year (which was an outlier). That said, I still think it is a buy for me.
