The Royal Mail share price is down nearly 20% this year! Is it a good buy?

After a strong 2021, the Royal Mail share price is down this year. Here, Charlie Keough looks at whether now would be a good time to buy.

Charlie Keough

Charlie Keough is a freelance investment writer. Prior to joining the Motley Fool UK, he worked for a global asset management company. He has also spent time working at a corporate finance boutique focused on sell-side M&A. He aims to buy blue-chip high yield stocks that he can hold in his portfolio for the decades to come.

Published 19 February, 2022 10:41 am GMT

| More on: IDS

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.

The Royal Mail (LSE: RMG) share price enjoyed a great 2021, with the FTSE 100 stock rising 50%. However, 2022 has not repeated this form, with nearly 20% year-to-date being shaved off the gains made last year.

So, after its impressive rise, and current dip, would Royal Mail be a good buy for my portfolio today? Let’s take a look.

Why has the Royal Mail share price fallen in 2022?

One of the reasons for the fall in price this year is due to the delivery delays the business was experiencing last month. Staff shortages due to the pandemic, as well as high demand around the Christmas period, meant customers nationally were not getting their post on time.

However, the share price stabilised after the release of its Q3 update in late January. Where, although domestic parcel revenue rose compared to pre-pandemic levels, it missed the mark when compared to 2020 figures.

Would I buy?

So, should I be buying the stock? Well, one factor that draws me to Royal Mail is the strides the firm is taking regarding restructuring and streamlining. As my colleague Zaven Boyrazian highlighted, Royal Mail announced its plans to cut 700 managerial positions through the company. While this is without doubt unpleasant for the impending ex-employees, the move is expected to provide £40m in annualised savings from 2023 onwards.

In the short term, this move will come at a cost. The price of sacking these employees could reach £70m. And, as such, Royal Mail has cut operating profit guidance from £500m to £430m. This impact on the firm’s profits may have negative connotations for the Royal Mail share price for the foreseeable future.

Yet, another factor that attracts me to Royal Mail is its low price-to-earnings (P/E) ratio. The business currently has a P/E of under five. And compared to its global rival FedEx (12.3), this tells me that Royal Mail is currently undervalued.

I also like the direction Royal Mail is taking with its GLS division. Management has plans to increase the size of the division, with a target of increasing its operating profits to €500m by 2024-2025. Last year it acquired Canadian firm Rosenau Transport to help meet this aim.

With this said, it must be noted that this expansion has the potential to be costly, and should it fail to meet these targets this could incur big costs for the business. This would most certainly hurt the Royal Mail share price.

Nevertheless, I like the direction the firm is taking. And should it be able to execute these moves effectively, I think we could see a rise in the Royal Mail share price. The business is currently undervalued. And although it may face headwinds in the near future, as it streamlines its operations, I think in the future this will pay dividends. As such, I would be willing to add Royal Mail to my portfolio today.