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I was right about the Royal Mail share price. Here’s what I’d do now

A Royal Mail GLS delivery man
Image source: GLS

Royal Mail (LSE: RMG) might have been struggling for the past few months, but in November its share price has really taken off. In the last month alone, it is up more than 20%. And even though it is still way lower than the highs seen earlier this year, it is still up by some 65% over the past year. 

Why is the Royal Mail share price rising?

The stock saw a spike in its share price following its half-year results released last week. On the day, it rose some 10% and has remained elevated since. I would have expected some correction by now, which in my observation can follow a sudden increase in price. But in this case, the stock has risen far more than I would have imagined. At 505p as I write, it is now back to levels last seen in August this year. 

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Clearly, this indicates that investors see more value in the Royal Mail stock than is currently visible in its price. It is not hard to see why. For the six months ending 26 September 2021, the company reported a 7% increase in revenue from the same time last year. Its pre-tax profits jumped by more than 18 times and its earnings per share rose by a little more than 19 times. 

Positive long-term outlook

In any case, I think the outlook for the logistics sector is very good for the long term. Last year, the company saw its parcels’ business overtake the letters segment for the first time in its history. This is no coincidence, of course. 

2020 was a year of online shopping, because there was not alternative. It showed both the potential and the capacity for e-commerce. And the sector’s growth has only been accelerated as a result. Much like other companies in the e-commerce ecosystem, from warehousers to packaging providers, I think that Royal Mail’s prospects have improved because of this. 

Dirt-cheap FTSE 100 stock

Despite this, the company remains quite cheap. Its price-to-earnings (P/E) ratio is around 6 times, while the FTSE 100 index’s average P/E is 20 times. For a company with strong growth prospects, this reflects clearly that there is much room for the share price to rise. And it is for exactly this reason that I bought the stock recently, when its price was still low. 

My takeaway

This does not mean that all will be smooth sailing for the company from here. Some challenges are already visible in the form of labour shortages and supply chain issues. And as we get into the festive season, they could show up even more. However, I doubt if they will do any long-term damage to the company. If anything, to me they are proof of demand for its services. 

I’d still buy Royal Mail, though preferably on a dip.

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Manika Premsingh owns shares of Royal Mail. 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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