Royal Mail shares have crashed 20% in 2022! Is this a bargain or a trap?

Royal Mail shares crashed in January after management cut guidance, but is this actually a buying opportunity? Zaven Boyrazian investigates.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of Royal Mail (LSE:RMG) haven’t had a great run in 2022, so far. Despite delivering record growth throughout 2020 and 2021, this business has taken a bit of a tumble. But is this a sign of trouble ahead or a buying opportunity for my portfolio? Let’s explore.

Investigating the Royal Mail shares performance

The recent tumble came on the back of delivery delays as well as a mixed third-quarter trading update. On the one hand, domestic parcel revenue between October and December 2021 continued to surge by an impressive 43.9% versus pre-pandemic levels. On the other, it came in 4.9% lower than a year ago. However, I’m not too surprised, since 2020 was an exceptional year for e-commerce.

At the same time, performance from its GLS division continued to expand with a 5% increase in parcel volumes reaching 239 million during the quarter.

Unfortunately, this wasn’t enough to replace the 2020 surge in sales. And consequently, total revenue actually fell 2.4%. But again, it’s still 17.1% higher than pre-pandemic levels.

Meanwhile, the leadership team continues to restructure and streamline the business. It has announced plans to axe 700 managerial positions through the company. While this is undoubtedly unpleasant for the soon-to-be ex-employees, the move is expected to deliver £40m in annualised savings from 2023 onwards.

However, the cost of sacking a large number of employees is high – £70m in this case. And consequently, the business cut operating profit guidance from £500m to £430m. Needless to say, with revenue growth stagnating and forecasts being cut, the fall of Royal Mail shares is hardly a surprise.

A trap or buying opportunity?

Analysts from JP Morgan Cazenove recently cut their price forecast for Royal Mail shares by 7%. In fact, this appears to have been what triggered the start of the stock’s decline last month. Yet, even after the reduction, the target price is still 768p. By comparison, shares of Royal Mail are currently trading at around 444p, suggesting the market may have overacted to the news.

That certainly seems like a buying opportunity in my mind, especially considering the stock is currently trading at a price-to-earnings ratio of 5.1!

But as cheap as that seems, I have some concerns. With the cost of living on the rise, due to inflation, higher energy prices, and a national insurance tax hike, consumer spending could soon take a significant hit.

And as households aim to cut unnecessary costs, the volume of e-commerce orders could fall. That means fewer parcels to deliver and, in turn, less revenue for Royal Mail.

Personally, I think there are quite a few unknowns about the operating environment Royal Mail is entering. What’s more, these threats are largely out of management’s control – a bad trait in my experience. That’s why I see it as a trap rather than a bargain. And it’s why I’m not going to be adding any shares to my portfolio today, despite the seemingly low price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Closeup of "interest rates" text in a newspaper
Investing Articles

Interest rates fall again! Here are 3 FTSE dividend growth shares to consider buying

As interest on cash savings becomes increasingly less attractive, Paul Summers has been looking at dividend growth shares for passive…

Read more »

Investing Articles

Up 10% today, I think this FTSE 250 growth share could continue to surge!

Babcock International's flying after upgrading its full-year forecasts. I think the FTSE 250 defence share might just be getting started.

Read more »

Investing Articles

The AstraZeneca share price jumps 5% on today’s strong results – but is it too expensive?

Harvey Jones hails the brilliant long-term performance of the AstraZeneca share price, but wonders whether the FTSE 100's biggest company…

Read more »

Investing Articles

Is this my chance to buy Alphabet shares?

A big step up in AI spending at Google has investors nervous, but has it created an opportunity to buy…

Read more »

Senior woman potting plant in garden at home
Investing Articles

£10k in savings? Here’s how an investor could aim for a monthly second income of £1,200

Mark David Hartley considers how investors could build towards an early retirement plan with a second income from a portfolio…

Read more »

Investing Articles

2 cheap shares to consider buying in a £20k ISA for income of £1,000 a year

Harvey Jones loves buying cheap shares and says these two FTSE 100 stocks look tempting today, especially as they offer…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Is it worth me buying Lloyds shares for 61p after a 49% rise?

Lloyds shares have risen significantly from their one-year traded low seen last February, which could mean no value is left…

Read more »

Investing Articles

I think this FTSE 100 fashion stock could skyrocket in 2025

JD Sports has had a disastrous few months of losses but 2025 looks primed to be the year for this…

Read more »