The Royal Mail (LSE: RMG) share price is down by more than 30% over the year as I write this Friday afternoon. So far, 2022 has been particularly bad for the stock. It has pretty much tumbled throughout. We could chalk up the latest share price drop to the broader stock market correction. But the fact is, the Royal Mail share price was dropping even before that. The FTSE 100 plunge has only exacerbated its decline.
Royal Mail share price makes it a dirt cheap stock
Because of this fall, it has become a seriously cheap stock. Its share price is now back to levels not seen since January 2021. At the time, the stock was climbing up fast as part of the post-vaccine development stock market rally.
But it is not just in absolute terms that the Royal Mail share price looks cheap. Its market valuations are exceptionally low too. It has a price to earnings (P/E) ratio of 4.5 times, which is abysmal compared to the 15 times levels for the FTSE 100 as a whole. Moreover, its P/E has actually fallen from the already low 5.2 times it was at the last time I wrote about it.
Even if I consider other valuation measures like price-to-sales (P/S), it is still cheap. Its P/S is at just 0.3 times compared to 1.4 times for the FTSE 100 index.
Good long-term prospects
I could understand why the share price is so low if there are fundamental challenges that the business has to contend with. That is not the case, however. In fact, I have been of the view for some time now that its prospects have improved significantly since the pandemic. The shift towards digital shopping has accelerated because of the lockdowns and Royal Mail’s parcel services play an important role in ensuring that.
Also, stress in the management-labour union relations were a huge problem for it in the past years, which kept the stock price sluggish. That is all resolved now, though. It has faced some disruptions recently because of coronavirus, which delayed Christmas deliveries and possibly dragged its share price down early in 2022. But hopefully that should be behind it as well.
What can go wrong for Royal Mail
We can never know for sure, though. The latest numbers for patients admitted to hospitals with coronavirus have risen recently, which is disturbing. Another wave of the virus could not just impact Royal Mail but also the rest of the economy.
Also, the economy could suffer a setback from elevated inflation levels anyway. Prices were already rising fast and now with the Russia-Ukraine war, commodity prices in particular are expected to stay high for an unpredictable amount of time. Cost pressures on companies as well as decreased real incomes for consumers could be a dampener.
What I’d do
Even then, I think these are short to medium-term concerns. I have bought the Royal Mail stock with the long-term in mind. Over this time, I think there is a good chance that it will be a pretty solid growth stock. I am now contemplating loading up on it while it is still really cheap.
