The Motley Fool

Thinking of buying the Royal Mail share price after its recent decline? Here’s what you need to know

The prospects for the Royal Mail (LSE: RMG) share price may appear to be relatively uncertain at the present time. After all, the stock has declined in value by 32% in the last two months following the release of a profit warning. It showed that the company’s strategy is not having the results that had been expected, and a revised plan is due to be put in place.

In the long run, the company could have recovery potential. It now has a low valuation relative to the wider index. But is now the right time to buy the stock alongside another ‘falling knife’ which released an update on Wednesday?

Growth potential

The company in question is the manufacturer of high technology components and systems, Senior (LSE: SNR). It released a trading update which showed that it’s on track to deliver results which are in line with expectations for the full year. Its Aerospace division has benefitted from continued positive activity in the large commercial aircraft sector, with production ramping-up on newer programmes, such as the 737 MAX, A320neo and A350.

The company has continued to make progress on new product introductions on programmes won over the last year, and expects investment activity to continue into the first half of 2019. The construction of its new Aerospace facility is progressing well. Its Flexonics division also recorded trading for the period in line with expectations.

Looking ahead, Senior is forecast to post a rise in earnings of 9% in the current year, followed by further growth of 17% next year. This puts the stock on a price-to-earnings growth (PEG) ratio of 1.1, which suggests that it may have a wide margin of safety following its 22% decline in the last two months.

Recovery potential

As mentioned, Royal Mail has also experienced a challenging two-month period. In the near term, the company’s share price could come under further pressure, with its bottom line expected to decline by around 14% in the current year. This is significantly below previous guidance, and shows that the expected results of its efficiency drive have been lower than expected. And with investor sentiment being weak, there could be further falls in the company’s share price in the near term.

With a new CEO at the helm, a revised strategy is due to be put into action over the coming months. This could create a catalyst for improved financial performance in the long run, but may lead to a share price which drifts lower in the near term.

Following its share price fall, Royal Mail now trades on a price-to-earnings (P/E) ratio of around 8.4, which suggests it offers a wide margin of safety. Its long-term growth prospects could be boosted by rising demand for parcel delivery, as well as further investment in its international operations. Therefore, while potentially volatile in the near term, its long-term turnaround potential seems to be high, in my opinion.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

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.