The Motley Fool

The Royal Mail share price looks cheap, but I’m not buying yet

Image source: Getty Images.

The Royal Mail (LSE: RMG) share price has plunged over the past few weeks. The stock has fallen 44% from the six-month high of 250p reached in mid-December.

After these declines, shares in the postal service are trading one of the lowest levels in history. That makes the Royal Mail share price look cheap at first glance.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

However, from a fundamental perspective, the stock continues to look expensive.

Falling profits

The coronavirus crisis is having a considerable impact on Royal Mail. While the service is still operating on a day-to-day basis, the general drop in business activity will have an impact on revenues.

At this stage, it is unclear how significant the hit to revenues will ultimately be. Nevertheless, City analysts have pencilled in a 90% decline in earnings for 2021.

The company has been struggling with falling revenues for years. And the latest crisis has only compounded this problem suggesting the outlook for the Royal Mail share price is bleak.

Right now, the stock is trading at a 2021 P/E of 49. Historically, the shares have changed hands for around 10 times earnings. A return to this level could see the stock fall a further 80% from current levels.

This is the worst-case scenario. If the economy recovers quickly from the crisis later this year, profits could come in above expectations.

But it seems as if the crisis has only accelerated the trend Royal Mail has been fighting for some time. People simply aren’t sending letters any more, and the coronavirus crisis has forced many companies that were still using this medium to abandon it and use emails instead.

If this solution works, it’s unlikely these businesses will go back to snail mail when the crisis is over.

Avoid the Royal Mail share price 

In other words, it looks as if Royal Mail’s growth days could be behind it. That’s terrible news for the Royal Mail share price.

A dividend cut looks likely as well. Based on current projections, dividend cover will fall to 0.25 next year. This suggests the payout will have to fall by 75% to remain sustainable.

All of the above implies about the outlook for the Royal Mail share price is bleak. Earnings are crumbling, and it is impossible to tell if they will ever recover. It certainly looks as if the trend is away from physical mail.

That’s going to be bad news for the company in the long run.

As such, while the share price looks cheap after recent declines, it might be best to avoid the stock.

If earnings continue to fall, it is highly likely that the shares will fall further as well. On top of this, it does not look as if the company’s dividend is sustainable at current levels.

All in all, there are better opportunities out there than Royal Mail.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Rupert Hargreaves 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.