Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.
Today I’m looking at Royal Mail (LSE: RMG) to ascertain if its share price has the potential to push higher.
Current market sentiment
The best place to start assessing whether or not Royal Mail’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.
At present, it would appear that the market is cautiously optimistic about Royal Mail’s outlook, although some City analysts have started to express doubts about the company’s future prospects.
In particular, it has recently been announced that Ofcom has opened an investigation of Royal Mail’s wholesale prices, after the firm’s competitor, TNT Post complained.
Unfortunately, this investigation means that Royal Mail now faces a period of uncertainty, as the company waits for the regulator to make a decision.
Further, as a result of this probe Royal Mail has been forced to postpone some price rises on commercial mail contracts, designed to offset falling letter volumes. This could mean that Royal Mail’s profitability is hampered until the dispute is resolved.
Upcoming catalysts
Obviously, the conclusion of Ofcom’s investigation into Royal Mail’s pricing policy will be the company’s most important catalyst going forward.
What’s more, investors will be waiting for Royal Mail’s next set of results and market update, which should reveal how much of an effect Ofcom’s investigation is having on the business. Royal Mail is currently scheduled to report full-year results on the 22nd of May.
In addition, any updates from Royal Mail will reveal how the company’s cost cutting plans are progressing. Indeed, Royal Mail’s management is currently in the process of implementing the company’s, “continued efficiency programme”, which aims to achieve annualised cost savings of £50m upon completion.
This programme is targeted at maintaining customer service, while reducing costs. Most of the cost savings will come from a reduction of the company’s management population and is expected to benefit 2014-2015 results by £25m, however, a one-off charge relating to job cuts will cost the company £100m.
Valuation
At current levels, Royal Mail trades at a forward P/E of 16.6, which makes the company, in my opinion, look expensive for two reasons.
Firstly, due to Ofcom’s investigation there is now a significant amount of uncertainty surrounding Royal Mail’s future prospects. For example, if the regulator fines, or prohibits Royal Mail from hiking prices, the company’s profits will take a hit.
And secondly, at a forward P/E of 16.6, Royal Mail is more expensive than the FTSE 100 as a whole, which trades at a P/E of 13.6 and due to the uncertainty covered above, I feel that this premium is excessive.
Foolish summary
So overall, I feel that Royal Mail is overvalued at current levels.
