Down 54%, is the Royal Mail share price now a screaming buy?

The Royal Mail share price has plummeted over the last year, but does the broader economic environment make it less attractive?

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Key Points

  • The company has lower trailing and forward P/E ratios than two major competitors
  • Pre-tax profit fell by 8.8% during the 2022 fiscal year
  • Inflation, energy costs, and lower parcel volumes all contributed to deteriorating results

Royal Mail (LSE:RMG) has seen plenty of ups and down in its time on the stock market. And over the last year, the Royal Mail share price has fallen 54%. So is now the time to buy this potentially cheap stock? Let’s take a closer look. 

Recent results

The company — which specialises in logistics and postal services — is a constituent of the FTSE 100 and owns well-known brands like Parcelforce Worldwide. It only recently released its 2022 fiscal year results and they appeared to be something of a mixed bag.

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One positive was that revenue increased very slightly, by 0.6%, compared to 2021. However, pre-tax profits declined by 8.8% to £662m. 

What was also worrying to me as a potential investor was that net debt more than doubled to £985m. In addition, the company’s cash balance fell by 50% to £307m. 

These last two figures (the increasing debt and falling cash balance) could mean than the business struggles to meet the challenges that may lie ahead.

All these negatives are reflected in the share price, down 21% in the past month. It currently trades at 282p.

It should be noted, however, that past performance is not necessarily indicative of future performance.

What’s the company doing about it?

Royal Mail is not, however, sitting around doing nothing. It has immediately embarked on cost-cutting. For instance, it has pledged to reduce costs by £350m over the coming year.

This is in addition to its decision to cut 700 manager-level jobs earlier this year. The company is also increasing the prices of mail and parcels.

Many of its problems have been caused by inflation. This is making raw materials used in the firm’s products more expensive. Also, wage inflation is resulting in increased costs. Surging oil prices have also led to higher fuel costs for Royal Mail. All of these factors have already played a role in the disappointing results.

Unsurprisingly, the business is forecasting a fall in revenue for the 2023 fiscal year, which may be partially due to lower parcel volumes after the pandemic, in addition to problems outlined above.

Is the share price a bargain?

Despite all of these difficulties, there is a very real chance that Royal Mail shares might be cheap at current levels. 

By using trailing and forward price-to-earnings (P/E) ratios, I can better understand if a company is under- or overvalued. These are found by dividing the share price by earnings (or forecast earnings for forward P/E ratios). 

Royal Mail has trailing and forward P/E ratios of 4.59 and 5.39, respectively. This is still significantly lower than global competitors FedEx and Deutsche Post, compared to earlier in the year when I last explored these P/E ratios.

StockTrailing P/E ratio Forward P/E ratio
Royal Mail4.595.39
FedEx10.538.87
Deutsche Post10.039.53

This indicates that I might be getting a bargain at the current share price.

Yet although the stock is potentially cheap, I will not be buying the shares any time soon. The company is clearly responding to factors like inflation and lower parcel volumes, but I will wait until the broader economic environment improves before thinking about buying.  

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Andrew Woods 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.

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 considered, so you should consider taking independent financial advice.

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