The Royal Mail (LSE: RMG) share price has increased in value by more than 100% over the past few months. Following this performance, some investors might be tempted to buy the stock ahead of a potential further increase in value. But is it worth chasing the shares higher? Today, I’m going to try and answer this question.
Is the Royal Mail share price worth buying?
Investor sentiment towards Royal Mail has improved drastically over the past few months. In my opinion, there a couple of reasons for this performance.
First of all, the company’s fundamentals have improved marginally since the beginning of the year. Even though the group has suffered from higher costs and a sudden sharp decline in letter volumes during the coronavirus pandemic, an increase in parcel volumes has helped offset this decline.
Second, earlier in the year, the stock looked too cheap. The Royal Mail share price was trading for less than the value of the group’s assets. This implied that the business more could be worth more if it were sold and broken up than if it continued to operate as a going concern.
Third, it seems to me as if the group finally has a long-term growth plan. After stumbling around for several years trying to figure out what it wants to be, I think Royal Mail’s decision to concentrate on parcels gives the organisation renewed purpose.
The company has had the infrastructure to build a leading parcel distribution network, encompassing returns, deliveries and pickups, for years. However, for some reason, management hasn’t capitalised on this. Instead, the organisation has allowed other operators to take market share. The group only launched its automated parcel sorting facilities in 2017.
Now Royal Mail finally seems to have woken up. In what it’s described as being the most significant change to the daily delivery service since the post box was launched in the mid-1800s, the firm will now collect parcels from homes. This will allow the business to capitalise on the booming e-commerce market.
I’m excited about this change. The company is charging 72p per parcel (plus postage) for pickups. This seems cheap compared to the time it usually takes to drop off a package at a post office. Customers can now also print postage labels at home.
To accompany these new services, Royal Mail is planning a significant investment programme over the next few years.
I’m optimistic the changes it’s making towards the parcels business will help the Royal Mail share price in the long term. However, with significant investment required, it could be sometime before this is reflected in the corporation’s bottom line.
As such, I’m not a buyer of the stock after its recent performance. While I think the company has entered a new chapter, it could be a while before investors are rewarded for their patience. In the meantime, there are plenty of other investments I’d want to hold instead.
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.