Is the Royal Mail share price a bargain after crashing 30%?

Shares in Royal Mail plc (LON: RMG) have crashed this year. But could now be the opportune moment to buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in Royal Mail (LSE: RMG) have been on a consistent downward trajectory over the past 12 months. Indeed, since the end of October last year, the stock has fallen 60%, underperforming its index, the FTSE 250, by around 55% excluding dividends.

Year-to-date the stock has fallen approximately 30%, excluding dividends, underperforming the FTSE 250 by 38%.

In my opinion, this time last year the firm was overvalued. In September 2018, the stock was trading at a forward P/E of around 20. I think that’s far too high for a low-margin, low-growth business like Royal Mail. A low- to mid-teens multiple would have been more suitable.

After recent declines, the stock has reached this level. At the time of writing, the Royal Mail share price is trading at a forward P/E of 7.9, falling to 7.5 in 2021, based on the City’s current growth targets. On top of this, the stock is currently trading at only 50% of tangible book value.

Turning positive

Royal Mail’s low valuation is the primary reason why I turned positive on the stock a few months ago. A forward P/E of 7.5 and 50% discount to tangible book value seems too cheap for this business. Granted, the company isn’t growing, but it still dominates the delivery business in the UK and has a growing international arm.

Management has also woken up to the fact the company needs to invest more to generate growth. It’s been a common complaint in recent years the Royal Mail has not been spending enough to drag the business into the 21st century. Instead, the group has prioritised its dividend to shareholders, which has starved the underlying business of cash.

At the end of May, Royal Mail announced it was cutting its dividend as it invests £1.8bn into the postal service over five years. While income investors have been left short-changed, I think this is the right decision for the business in the long term. And if the extra investment can help Royal Mail return to growth, improve efficiency and profit margins, then I think there’s a good chance the stock could rise substantially from current levels.

A change of direction

At this stage, investor sentiment towards Royal Mail is rock bottom, and it’s unlikely to improve unless the company can prove it’s moving on from past mistakes. A return to growth would be a great start, but this is unlikely to happen overnight. It might be a year before we see any improvement.

With this being the case, while shares in Royal Mail Look cheap at the current price, I don’t think there’s going to be any substantial re-rating of the stock anytime soon. There’s even a chance there could be more pain ahead for investors if its transformation plan struggles to get off the ground.

Put simply, this isn’t a stock for the faint-hearted. If you want to snap up this bargain, you need to be prepared to deal with the volatility that might come with it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »