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Why I’d buy Royal Mail shares as the Christmas season starts

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Surprised Black girl holding teddy bear toy on Christmas
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As I have been following Royal Mail (LSE: RMG) shares over the past year, I have been impressed by the company’s resilience. 

The group was handed a windfall in the pandemic, as stuck-at-home consumers had no choice but to order their shopping online and post parcels to friends and relatives. 

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I was sceptical that this trend would last, but it has. Group profit before tax is expected to grow 10% in the current financial year, following a triple-digit increase last year.

For the five months to the end of August, revenue increased 8.2% year-on-year and by 17.7% compared to the same period in 2019.

The outlook for Royal Mail shares 

Clearly, growth has slowed, but the firm has tough comparisons with 2020. The very fact that the business is registering growth at all shows that consumer habits might have changed for good following the pandemic. 

That is why I would buy the stock as the Christmas season starts. This is always a busy period for the company, but this year promises to be even more hectic than usual. 

Consumer trends have changed, and consumer spending is increasing. Therefore, I think the corporation will experience an incredibly busy period. The next few months could even be one of the liveliest periods in the company’s history, as it benefits from the dual tailwinds of higher consumer spending and changing habits. 

On top of these tailwinds, the stock also looks relatively inexpensive. It is trading at a forward price-to-earnings (P/E) multiple of 8.2 with a potential dividend yield of 2.4%. Considering the company’s growth potential, I think these metrics look far too cheap. 

City analysts also have an average price target for the stock of 659p. 

Significant challenges

Despite all of the above, I should point out that the group is facing some significant challenges. It is having to fork out hundreds of millions of pounds to modernise its facilities. Further, like many other companies, Royal Mail is facing a challenge to hire enough temporary staff for the winter period. If it cannot hire enough staff, customer service could deteriorate. 

If customers start to move elsewhere due to deteriorating service, this could erode the headway Royal Mail has made over the past two years. It may lose market share to competitors, and consumers may lose confidence in the group’s ability to deliver. 

These challenges are worth keeping an eye on, in my opinion. Competition has always been a considerable risk for the company, and it will only worsen as more businesses try to capitalise on the burgeoning e-commerce market. 

Even after taking these risks and challenges into account, I am excited by the group’s potential. If Royal Mail can continue to build on its successes over the past two years and expand overseas, I think the company has substantial potential. That is why I would capitalise on the stock’s current valuation and buy the shares for my portfolio today. 

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Rupert Hargreaves 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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