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Is a turnaround warning a harbinger of things to come for Royal Mail shares?

In theory, at least, a share price hitting an all-time low can be a blessing or a curse for potential investors. On the one hand, a price that is at its lowest may be a bargain investment – getting a good company while it’s cheap. On the other hand of course, hitting all-time lows means something isn’t going well for the company.

I suspect Royal Mail (LSE: RMG) hitting recent all-time lows at the start of this month is much more likely to be a sign of bad things to come, rather than an opportunity for investors looking for a bargain. After all, all-time lows are only all-time until the next time the share goes even lower.

Strikes and profit margins

The news that sparked the recent price drop was that Royal Mail might fail to hit the financial targets it set out for itself as part of a turnaround plan to overhaul the business. Specifically, the company expects to miss its target to stabilise profit margins in the 3% to 4% range in the 2021–22 year, unless it makes “significant progress” this year. The announcement in itself seems to suggest this is unlikely.

At the time, the sell-off saw Royal Mail’s share price hit a then-all-time low of just under 179p. Mid-month it dropped further to just over 175p per share. The problem, according to Royal Mail, is primarily due to the threat of industrial action from its workers.

This probably comes as no surprise to those of us living in the UK. Headlines about postal workers threatening to strike, particularly at times when public sympathy for such action may be lacking (the threat over Christmas, for example, didn’t seem to garner much support from the general public), do not instil much confidence in Royal Mail as a service to depend on.

Of far greater concern for the company though, is the fundamental change it is undergoing, away from traditional mailing services to package delivery.

Snail mail and online shopping

Royal Mail needs to make this change because of two factors that I can’t imagine will go away…ever. The first is that nobody sends letters anymore. Certainly we all get paper bills through the door, but emails, text messages, instant messaging, and cheap phone calls have all but left person-to-person correspondence of this kind obsolete.

Occasionally people may decide to send a letter for the novelty, but I can’t foresee any scenario that would have people reverting to snail mail anymore than I can see people handing in their cars to go back to horse and carriage.

The second area, and one Royal Mail does hope to make inroads with, is parcel deliveries. For the average consumer, this usually comes in the form of receiving online deliveries, for which the retailer decides on the delivery service.

Royal Mail’s success in this area could be hit or miss. It is certainly coming from a weak position – the corporate delivery firms like FedEx and UPS are long established as the couriers of choice for many retailers. If Royal Mail continues to have the sword of industrial action hanging over its head, I doubt it will be able to convince many firms to use its service.

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Karl 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.