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Here’s why FTSE 100-member Royal Mail’s share price could be set for a rebound

The performance of the Royal Mail (LSE: RMG) share price in recent weeks has been relatively disappointing. It has fallen by over 20% in the last four months, which suggests that investors have become increasingly concerned about its prospects.

Now though, the company offers what appears to be a low valuation. As such, it could be worth buying alongside another share which reported encouraging results on Monday. Both shares could outperform the FTSE 100 in the long run.

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In-line performance

Reporting upbeat results on Monday was supplier of integrated training and support solutions to the defence and regulated civilian sectors, Pennant International (LSE: PEN). The company is performing in line with expectations, recording a more-than 100% rise in pre-tax profit to £2.03m. It’s been able to successfully rescope a key contract with a major UK prime contractor during the first half of the year, while also delivering all remaining training aids on Middle East contracts that were signed in 2016.

Looking ahead, the company’s contracted order book of £31m, scheduled for delivery over the next three years, suggests that it has a bright future. It also has a pipeline of potential opportunities that are valued at over £100m in aggregate.

With Pennant International currently trading on a price-to-earnings growth (PEG) ratio of 0.1, it seems to offer good value for money. With net cash of £3m, and what seems to be a solid growth strategy, its share price performance could improve over the medium term.

Volatile prospects?

As mentioned, the Royal Mail share price has disappointed in recent months. The company’s financial outlook is unlikely to cause a sudden improvement in investor sentiment, with it due to report a fall in earnings of 14% in the current year. While a return to growth is forecast for 2019, the company’s bottom line is expected to increase by just 1% versus the current year. This suggests the challenges that have held back its performance in recent years are set to continue.

With the majority of Royal Mail’s revenue being generated in the UK, political uncertainty remains a key risk facing the business. Although cost avoidance measures are helping to make the UK operations more efficient, volumes are likely to remain under pressure. This could cause a further decline in the company’s financial performance in the near term.

In the long run though, a pivot towards international markets could take place under the new CEO. This could be done through a mix of organic growth and acquisitions, with the prospects for international markets much stronger than the UK, according to the company’s recent update. As such, and with the stock now having a price-to-earnings (P/E) ratio of 14 following its recent decline, now could be the right time to buy it ahead of what may prove to be a period of improved performance.

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Peter Stephens 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.

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