It’s been a while since Royal Mail (LSE:RMG) shares reached dizzying heights above 600p. Down 30% in the past year, the share price hit 52-week lows a month ago at 317p. Personally, I think Royal Mail shares are now getting too cheap for me to not buy. Let me explain why!
Pandemic woes only temporary
The pandemic has been both a blessing and a curse for Royal Mail shares since the start of 2020. To begin with, lockdowns forced us all to stay at home. We ordered a lot online, with Royal Mail benefiting from surging parcel volumes.
However, part of the slump in the share price over the past year has been due to Covid-19 related issues. For example, staff shortages due to self-isolation requirements and illness have seen a large rise in complaints. There are several well-documented news articles highlighting extensive delays in deliveries, particularly from the start of the year.
This impact has clearly been felt on Royal Mail shares. Yet I don’t see this as a long-term problem. Self-isolation requirements have now been cut, and pandemic-related problems shouldn’t cause the service large issues going forward (in my opinion).
Parcels still performing well
Another driver behind the move lower has been concern that parcel volumes will drop significantly going forward. Personally, I don’t see this as being justified, which also makes me believe that Royal Mail shares are undervalued.
In the latest quarterly update, parcels volume for the nine months of 2021 covered was down by 7% year-on-year. Yet when I compare the Q3 figures alone to the Q3 numbers from 2020, I still see strong growth. Volume was up 33% from these two quarters.
What this tells me is that although key parcels volume is falling when looking at 2021, it’s still much higher than it was during the first year of the pandemic.
Cheap levels to buy Royal Mail shares
The above reasons make me think that the market hasn’t quite judged the company fairly when I look at the current share price. However, my subjective opinion is only one element of thinking that a share is undervalued. I also need to be able to show this via numbers.
A conventional way to assess this is by considering the price-to-earnings (P/E) ratio. I think that anything under 10 represents an undervalued stock. Royal Mail currently has a ratio of 3.92, making it one of the lowest in the entire FTSE 100!
In the latest update, it also expects operating profit for the full year to be around £430m. This will be lower than last year, but still a significant jump from the £55m in 2020, the £160m in 2019 and £66m in 2018.
Risks to my view are centred around parcels volume remaining robust for the rest of the year. My numbers would also be thrown off if earnings are revised lower, as this could make Royal Mail shares less attractive from a P/E point of view.
That said, I’m seriously considering buying Royal Mail shares now given the current price.
