After the Royal Mail share price crash, it’s a cheap FTSE 100 stock I’d buy

The Royal Mail share price has crashed by 30% over the past year, making it a great opportunity for Manika Premsingh to buy the stock. 

| 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.

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. 

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.

Manika Premsingh owns Royal Mail. 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

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Could Raspberry Pi shares hit £5 by 2030?

After a strong start out of the blocks this month, our writer asks whether Raspberry Pi shares could move further…

Read more »

Close-up of British bank notes
Investing Articles

Five 5%+ yielders I’d buy for an ISA today!

Our writer identifies a handful of FTSE 100 and FTSE 250 firms each yielding at least 5% he'd happily buy…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

5 stocks with 5%+ yields I’d love to buy and hold in a Stocks and Shares ISA

Harvey Jones is keen to add these five FTSE 100 high-yielders to his Stocks and Shares ISA, ideally before they…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d target £880 of passive income annually, spending £10K now on this FTSE 100 share

Our writer explains how he would add to his diversified portfolio happily by investing in this FTSE 100 passive income…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

3 reasons I think the Scottish Mortgage share price could keep rising

Christopher Ruane explains a trio of reasons he thinks the once-mighty Scottish Mortgage share price could be set to increase…

Read more »

Syringe and vial on blue background
Investing Articles

Is this forgotten FTSE share about to make investors rich all over again?

Not long ago, this FTSE share was all the rage before demand dropped off and things went south. Is it…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d use these 5 Warren Buffett approaches to build wealth

Christopher Ruane outlines a handful of investing lessons from billionaire Warren Buffett that he thinks can help a small investor…

Read more »

US Stock

Nvidia stock: 3 things investors need to know as it surges towards $150

Nvidia is a stock that's had an extraordinary run in 2024. Edward Sheldon highlights some important things investors should know.

Read more »