The Royal Mail (LSE: RMG) share price has almost halved in 2022, culminating in the company’s ejection from the FTSE 100 index in the latest reshuffle.
Is a recovery on the horizon for Royal Mail shares, or can investors expect further pain ahead? Let’s explore.
A FTSE 250 demotion
After a strong performance over the pandemic, Royal Mail shares have experienced a significant reversal in fortunes. Last month, the company was hit by a massive target price downgrade by broker Peel Hunt. It reduced its forecast from 500p per share to 307p. Today, the Royal Mail share price stands at 270p.
Unfortunately, a weakening consumer environment combined with inflationary pressures and a domestic business with a constrained rate of change makes for a highly challenging future.
Alexander Paterson, Peel Hunt analyst
The firm’s financial results for FY22 present a mixed bag in my view. Adjusted operating profit rose by 8% due to improved profitability. However, the main business division also oversaw a 1.6% year-on-year decline in revenue.
This was offset somewhat by a 4.4% revenue increase for its international courier arm, GLS, driven by a recovery in B2B volumes and freight. Overall revenue for the group remained flat with a meagre 0.6% uptick over the year.
The UK government’s decision to cut expenditure on Covid-19 testing kits adds to Royal Mail’s woes. Revenue from test kit deliveries accounted for 7% of the company’s total parcel volume in 2021-22. It will be difficult for the delivery outfit to replace this lost revenue source quickly in my view. Regaining blue-chip status seems a distant prospect.
Can the Royal Mail share price bounce back?
Royal Mail is undergoing a process of modernisation to revive its ailing share price. Over 50% of the 506-year old group’s parcels are now processed automatically. In addition, the company is also expanding its digital offering to improve customer experience and efficiency. New customer apps for GLS in Spain and Denmark show promise.
Royal Mail shares offer potential value at present. The company’s price-to-earnings ratio is low at 4.39. Shareholders also benefit from a juicy 6.2% dividend yield. This adds to the stock’s appeal as a useful investment to protect my portfolio from inflation.
However, the business faces major uncertainties in the form of potential strike action. Yesterday, the Communication and Workers Union (CWU) served an industrial action balloting notice on Royal Mail.
The CWU will issue ballot papers to 115,000 members on 28 June. A result is expected on 19 July. If the company is unable to resolve a pay dispute with its workers, there could be further pain ahead for the Royal Mail share price.
Would I buy?
Royal Mail shares do look cheap. However, I suspect it’s too early to say whether the company is out of the woods just yet. I like the healthy dividend yield and the company’s digital drive, but the prospect of industrial action is a big concern.
Currently, I’m reluctant to invest as I believe there are better opportunities in the stock market for me to put my spare cash to work. If Royal Mail can successfully navigate its trade union negotiations, I may reconsider its investment prospects. However, I wouldn’t buy today.
