Key points
- With a P/E ratio around 7, this stock could be a great bargain
- The underlying fundamentals indicate controlled expansion
- Earnings growth has been strong for the past five years
Royal Mail Group (LSE: RMG) is one of the most recognisable companies in the UK. Its brands include Royal Mail and Parcelforce Worldwide. With many people ordering more online during the pandemic, the company has been performing rather well recently. There are two reasons why I think the Royal Mail share price is worth a close look for the future too and why this company could be a shrewd investment for my portfolio.
The Royal Mail share price is a ‘bargain’
I think that using a company’s price-to-earnings (P/E) ratio is a usually good way to gauge if a stock is over- or undervalued. This is found by dividing the Royal Mail share price by its earnings per share (EPS).
Royal Mail currently has a P/E of 7.05. That’s a figure generally seen as low but on its own, doesn’t really tell me all that much. However, the average P/E ratio for the industrial transportation sector is 36.8. Furthermore, one of the company’s global rivals, FedEx, has a P/E ratio of 13.4. This suggests that the Royal Mail share price could be undervalued. I believe I could be getting a bargain at current levels.
The underlying fundamentals are strong
Royal Mail Group has also produced solid earnings for its shareholders over the past five years. For the years to the end of March, EPS has grown from 44.1 in 2017 to 52.1 in 2021. Looking at its compounded annual growth rate, EPS has risen 3.4% each time. This is both strong and consistent.
A recent trading update from the firm for the three months to 31 December 2021 provided some welcome news. Domestic parcels revenue grew 44% compared to the same period in 2019. That said, when compared with the same period in 2020, revenue fell 5%. This is perhaps unsurprising given that people were no longer dependent on ordering online. But it’s also an indication that the recovery from the pandemic hasn’t been great for Royal Mail’s business.
On another front, recent pandemic developments have also been negative. With about 15,000 staff absences from the Omicron variant in early January, the company’s service capability was negatively impacted. For me, however, this is a short-term issue that should subside in the very near future. The leadership team is also spending £70m in an attempt to “streamline operational management”. This will reduce the management workforce by 700 and save around £40m per year.
I see The Royal Mail share price as underpinned by strong and consistent earnings growth and think it’s a bargain when compared with its sector and competitors. Yes, there are some issues, but I think these can be resolved. I will therefore be buying Royal Mail shares for long-term growth.
