Is the Royal Mail share price about to fall further?

The Royal Mail share price took a near-double-digit hit this week after an investment bank downgraded the stock. Zaven Boyrazian investigates.

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The Royal Mail (LSE:RMG) share price had quite an impressive run since the pandemic started. With demand for parcel delivery skyrocketing in line with e-commerce adoption during lockdowns, the company quickly began watching profits roll back in. So it’s hardly surprising the stock surged 220% between March 2020 and the end of 2021.

But this performance has taken a hit in 2022, due to the various macro-economic factors plaguing the market today. However yesterday, the Royal Mail share price took a near double-digit hit following a downgrade from analysts at the investment bank Liberum. Is there something to worry about? Or is this actually a buying opportunity? Let’s explore.

The tumbling Royal Mail share price

It’s no secret that the firm’s relationship with its employees, specifically the unions, is quite strained. After two years of an adversarial dispute, the Communication Workers Union (CWU) successfully secured pay rises for Royal Mail workers in December 2020.

Matter resolved, right? No. The CWU recently returned, demanding additional and unconditional pay rises for workers to match today’s elevated level of inflation. Regardless of whether these demands are reasonable, it does pose a problem.

According to the Bank of England, inflation will level out at 6% in spring 2022 and then steadily fall. Should Royal Mail agree to raise wages by the same amount, profitability will likely drain away. Let’s not forget that the company’s operating margins, even after deploying more efficient facilities, still stand at a meagre 7.9%. That’s obviously bad news for the Royal Mail share price.

But what if the company decides to reject the pay demands? That way, there’s no longer a problem, right? No. I think it would be more than likely worker strikes or other disruptions are likely to emerge as a consequence. And again, that’s bad news for the Royal Mail share price.

This is the argument presented by Liberum, which decided to downgrade the stock from ‘hold’ to ‘sell’ on the back of this news.

Taking a step back

As frustrating and concerning as the situation may be, there are some additional factors to consider. Firstly, if I assume Liberum is accurate in its assessment, then a buying opportunity may soon emerge if the Royal Mail share price continues its downward trajectory.

Today, the stock is trading at 359p. By comparison, the investment bank has placed its renewed valuation at 355p. That means shares could have already finished their tumble and could begin a steady recovery as this situation progresses and the two parties meet up at the negotiating table.

In the meantime, management’s ambitious international expansion plans are proceeding on schedule. Its GLS division is growing faster than the UK division and operates with higher margins. Over time, this segment could become the primary source of income and help offset any margin pressure from the proposed pay rises.

The bottom line

All things considered, the recent fall in the Royal Mail share price doesn’t concern me too much as a long-term investor. Having said that, I’m not in any hurry to buy the shares, given the level of uncertainty around the situation. Once the dust settles, I may leverage this as a buying opportunity, but I’m keeping the stock on my watchlist for now.

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.

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