Where will the Royal Mail share price go in 2022?

The Royal Mail share price is up by double-digits in the last year, but can the momentum continue in 2022? Zaven Boyrazian investigates.

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The Royal Mail (LSE:RMG) share price has been on a wobbly but relatively healthy run lately. The stock is up just over 12% in the last 12 months. And the momentum seen throughout 2020 has pushed its valuation well above pre-pandemic levels.

What’s behind this upward trajectory? And can it continue in 2022? Let’s explore.

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A successful turnaround

Between 2018 and 2019, this business was running into quite a bit of trouble. Costs were on the rise, while productivity went out of the window. And the end result was the bottom line shrinking by around 32%. Disgruntled investors decided to jump ship, and the Royal Mail share price collapsed by nearly 60% over the two-year period.

As it turns out, the pandemic created a near-perfect environment for management to change tactics and get the business back on track. With everyone stuck at home, the rising popularity of e-commerce drove demand for parcels delivery solutions through the roof.

Looking at the latest half-year report, parcels volumes were up 33% versus pre-pandemic levels. And these have continued to climb by a further 8% versus 2020. As a result, analysts have forecast earnings to reach 62p per share by the end of its 2022 fiscal year (spanning March to March). That’s almost a 190% jump versus pre-pandemic levels.

The surge in cash flows halved the group’s net debt, drastically improving Royal Mail’s financial health. And with surplus cash, the management team has announced plans to return £400m to shareholders through a share buyback programme, as well as a special dividend.

This is obviously a positive sign. And providing the fundamentals continue to improve, with parcel volumes staying elevated, I think it’s likely the Royal Mail share price will continue to climb higher in 2022.

The Royal Mail share price could become volatile

As encouraging as it is to see some stellar performance after years of lacklustre results, there are some potential threats to consider. My primary concern surrounds the group’s labour force. The pandemic has led to an elevated number of absences through illness, while Brexit triggered a national labour shortage. As such, finding enough warehouse workers and drivers is proving challenging for many companies.

Demand for its services may be high, courtesy of the e-commerce boom. But if the firm cannot complete deliveries on time, online retailers will likely start taking their business elsewhere. Needless to say, that could significantly interrupt the group’s recent growth trajectory, probably sending the Royal Mail share price in the wrong direction.

Time to buy?

All things considered, my opinion on this business has improved over the last year. And with both revenues and earnings on track to continue rising, I believe the Royal Mail share price can continue to ascend in 2022. Having said that, I’m not tempted to buy any shares today simply because I think there are better investment opportunities for my portfolio elsewhere.

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Zaven Boyrazian 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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