The Motley Fool

The Royal Mail (LSE: RMG) share price is recovering. Is it a buy?

Image source: Getty Images.

The Royal Mail (LSE: RMG) share price is up 72% to 214p, from its March low of 124p. Indeed, it surged 17% yesterday alone as news came that parcel deliveries are booming, and its finances are looking better than expected.

This good news was reported by a positive five-month trading update, stating that parcel revenues are up 33% from last year, and total revenue increased by £139m.

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, letter volumes declined 28% and letter revenues dropped by 21%. In addition, the combined costs of adapting the business from letters to parcels, and dealing with the Covid-19 outbreak, added £160m to its outgoings.

So, all in all, despite a bit of good news, Royal Mail is continuing its trend of declining profits. Moreover, it is expected to make a material loss this year. 

Royal Mail shares maybe overvalued 

The median 12-month price target for Royal Mail sits at 165p per share. Of 13 analysts, Goldman Sacks is the most positive, offering 200p target. However, even this is below the current trading price of 214p, indicating that Royal Mail stock could be overvalued.

Indeed, according to the Financial Conduct Authority (FCA), Royal Mail is one of the most shorted stocks. Short sellers effectively bet against a company’s shares by borrowing them, selling them, and then buying them back at a lower price before returning the shares. The seller then pockets the difference.

This entire strategy centres on high confidence that a stock will drop in price. So, the fact that institutional short-sellers are on to the Royal Mail doesn’t build confidence in the firm’s current prospects; the share price is expected to fall.   

What is the future for the company?

That said, there is recognition among management at the Royal Mail that if the business can adapt from focusing on letters to parcels quickly enough, it could be in a good position for the future.

However, this will depend to a large extent, on the willingness of its workers’ unions to facilitate the move. Currently, there is an over-reliance on sorting letters by hand and outdated working practices. Automating many of these processes to improve efficiency will likely involve job losses, or certainly personnel movements. Consequently, moves to turn the postal business around are meeting resistance.

From a business perspective, this friction prevents Royal Mail from attending to the needs of its customer base, and by extension, its shareholders. Fewer customers means less revenues, smaller profits, and perhaps no dividend re-installation.

Customers want parcel deliveries and urgent post. Indeed, next-day delivery is often essential for many businesses and other Royal Mail customers. Being able to deliver these requirements is vital to the future success of the firm.

Until Royal Mail reaches agreement with its unions, the transformation it needs cannot occur. I’m holding back my money until it does. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Rachael FitzGerald-Finch 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.