What You Were Selling Last Week: Royal Mail PLC

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful“. Or, in other words, sell when others are buying and buy when they’re selling. 

But we might expect Foolish investors to know that, and looking at what Fools have been selling recently might well provide us with some clues to investments that are past their prime.

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been selling in the past week or so, and what might have made them decide to do so.

Santa came early

Since the flotation of Royal Mail (LSE: RMG) in early October, its share price has soared by nearly 78%.  Whilst arguments about whether or not the government sold the company off far too cheaply continue, there’s no doubt that Santa came early for anyone lucky enough to have received an allocation of 227 shares — their £750 initial investment turned a profit of  £585 in less than three weeks following Royal Mail’s listing.

But for the past month, Royal Mail’s share price has essentially stagnated — it hit a peak of 587p on 4 November, subsequently fell back to as low as 533p by the end of that month, and finally regained its peak earlier this week.  Perhaps the looming expense of Christmas made some people decide to take a quick profit.  Or maybe others felt that the company is now fully valued, and not worth holding for the long term. Either way, Royal Mail is in the number 1 spot in our latest “Top 10 Sells” list*.

Shrinking postbag

So what are the prospects for Royal Mail?  Well, the business that most people probably associate with Royal Mail — delivering letters to private houses — continues to be hit by new technologies like email and the provision of services online. For example, junk mail has been getting supplanted by junk email, and many people now read their bank statements on a website, rather then receiving a paper one in the post every month.

As a result, Royal Mail’s letter business has shrunk 30% since 2007, and its revenue from letter delivery suffered a 4% drop from April to October this year, as revealed in its recent interim half-year report. That said, it still has an almost total monopoly on residential letter delivery, and it’s a business with a massive barrier to entry, so it’s not a source of revenue that’s going to dry-up any time soon. Indeed, in its recent report Royal Mail said that its letter business remains “a key part” of its future success.

Shifting boxes

Parcels are where the potential growth is for Royal Mail. You can’t send physical goods by email, and Amazon’s recent announcement of delivery-by-drone within “four, five years” was nothing more than a publicity stunt. (Technically possible? Yes. Realistically likely to happen, given what “delivery” actually involves and the potential for law suits? No.)

Shifting boxes now accounts for more than half of Royal Mail’s revenues, with 9% growth over the half-year helping the company double its pre-tax profit. Mind you, that revenue growth was driven by changes to its “size-based pricing” — parcel volumes were actually broadly unchanged compared with the same period last year, with strong growth in the volume of business account parcels and Parcelforce Worldwide being offset by lower volumes in domestic retail channels, because people were put off sending bigger parcels by the same size-based pricing that increased revenue.

Significant revenue growth

It’s all part of Royal Mail’s strategy to grow its parcel revenue by “leveraging structural trends in e-retailing” (seriously, that’s what it says) and “optimising its traffic mix” by minimizing unprofitable services. As chief executive Moya Greene explained in the interim half-year report:

We changed prices as part of our size-based pricing approach and anticipated that some volume would transfer to Parcelforce Worldwide from the core network, with some larger, uneconomical items exiting our networks completely.

The company’s confidence in the future of its parcel business is underwritten by the opening of a new Parcelforce processing centre in Chorley in September, together with ten new, replacement or extended parcel depots around the country in the past half-year. And commenting in the interim results, Moya Greene was expecting the traditional “peak parcel” period of Christmas to demonstrate the revenue-generating value of its new size-based pricing:

“Depending on the strength of the seasonal parcels volume growth in late November and December, this may result in Royal Mail reporting broadly unchanged parcel volumes but significant revenue growth for the nine months to December 2013.”

It’s also worth considering that the flotation resulted in a lot of people each getting a relatively small number of shares in Royal Mail. Almost 700,000 people, who asked for up to £10,000 of shares, got just £750 worth, with people who asked for more than £10,000 worth getting nothing at all. So, it could be that last week’s sales were just some people taking a quick “windfall”-type profit, rather than having sold because of any fundamental doubts about the company’s long-term prospects.

Top growth share

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> Jon doesn't own shares in Royal Mail.

* based on aggregate data from The Motley Fool ShareDealing Service.