Royal Mail PLC Could Be Worth 740p


Did the government sell Royal Mail (LSE: RMG) too cheaply?

The share price says so, with it reaching over 600p having been sold off by the government at just 330p.

However, Royal Mail could have more gas left in the tank.

Indeed, earnings per share (EPS) forecasts are very encouraging for the company, with EPS expected to increase by 33% in the year to 31 March 2015 and by 15% the year after.

This is highly encouraging and beats the market average of 4-7% hands down, which shows that Royal Mail is a lot more than just a dull postal delivery network, with its parcels business in particular showing signs of life.

The main reason for this seems to be the internet, with more and more people across the UK buying online and having their goods delivered. Royal Mail has been, and should continue to be, a main beneficiary of this demand.

Back to the upbeat EPS forecasts and, when combined with a forward price to earnings ratio of 13.4 (using EPS in the year to March 2015), Royal Mail currently trades on a price-to-earnings growth (PEG) ratio of just 0.4.

This seems rather low, so even being conservative and using an average growth rate in EPS over the next two years (i.e. using a lower growth rate in EPS), the PEG ratio is still just under 0.6.

This shows just how attractive the current share price could be.

Indeed, if Royal Mail were to trade at a PEG ratio of 0.7 (which is still below the PEG sweet-spot of 1.0, and therefore very attractive), it would mean shares trading on a forward P/E of 16.6. This would equate to a price of around 740p, which is just over 23% higher than the current share price.

Of course, shares are unlikely to continue their meteoric rise without posting falls along the way — no stock experiences unchecked growth, after all. However, Royal Mail does seem to offer potential upside, as well as the opportunity to benefit further from a structural shift in the way in which UK consumers buy their goods.

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> Peter does not own shares in Royal Mail.