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What’s happening with the Royal Mail (LON: RMG) share price?

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Royal Mail Group (LSE: RMG) did not have a good day Wednesday. With the biggest FTSE 100 fall of the day, the Royal Mail share price had crashed more than 7% by early afternoon. It has made me wonder again whether I should buy it for my Stocks and Shares ISA.

This latest setback comes less than a week after Royal Mail revealed positive trading for the five months to August. In the update, on 23 September, Chair Keith Williams said, “In Royal Mail, we are increasingly confident that domestic parcels are re-basing at a significantly higher level than pre-COVID and believe we are maintaining our share of the market. Domestic parcel volumes are up around a third compared to pre-COVID“.

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He went on to say the company expects adjusted operating profits and margins in the second half to beat the first half. Is that not enough for investors? It would appear not, as the RMG share price is now down 8% since the update.

Pandemic effect

I can’t help wondering if shareholders have been put off by weak comparatives to last year. Volumes and revenues compared to 2019-20, prior to the pandemic, were healthy. But against 2020-21, total parcel revenue grew by only 0.1%, with domestic revenue up by 4.1%.

On the volume front, things looked poorer. Total parcel volumes fell 12% year-on-year, with domestic volumes dipping 5%. Last year was, of course, boosted by the pandemic, which forced so many of us into having things delivered by post. But while the year-on-year comparison will reflect that, and comparisons with 2019-20 look much better, are things really as good as they appear?

Compared to a very poor year

Domestic parcels volumes rose 34% over the same period in 2019. But that full year saw a hefty 36% fall in EPS. And that was on top of a 33% drop the previous year. So improvements over 2019-20 are actually from a very low level. It was the worst year, by far, in recent times.

With that in mind, I’m perhaps not surprised by the market’s lacklustre reaction after all. We might be back to growth, but could it be just a blip in a longer-term decline?

The pandemic certainly gave Royal Mail a one-off boost. But because of that, I don’t think we can really draw any longer-term conclusions from the most recent update. I guess we won’t know how the long-term trends are really looking until we see a full year that’s totally clear of any pandemic effect. And maybe another year on top of that, to see if we’re free of the previous Royal Mail effect.

Royal Mail share price profit

That might make me sound super bearish towards Royal Mail. But I’m really just looking for possible reasons for the current share price weakness. And one thing I’ve neglected is the simple possibility of a bit of profit taking. After all, the Royal Mail share price has still more than doubled over the past two years.

Overall, I’m actually cautiously optimistic. I don’t think I’ll add Royal Mail to my portfolio just yet. But I might do once we’re further in the post-Covid clear and I get a better feel for the long-term outlook.

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Alan Oscroft 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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