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Royal Mail shares are at a 2-year high. What would I do now?

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The Royal Mail (LSE: RMG) share price has been on a downward spiral since May 2018. This has been due to both a lack of modernisation and most recently, the devastating effects of the pandemic. But since hitting lows of 125p in March, the FTSE 250 stock has seen steady gains. This means that it is currently priced at around 325p and is at its highest price since November 2018. These gains have mainly been driven by strong performance in the parcel sector and plans to modernise the business. Is it therefore a good opportunity to buy Royal Mail shares or are they now far too expensive?

A strong trading update

Although the company did still make an operating loss of £20m for the half year ended 27 September 2020, there were a number of positives. For example, the growth in online shopping and delivery of parcels during the pandemic led to revenue growth of nearly 10%. This shows that the group can still grow, despite the challenging economic conditions.

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Another extremely positive aspect for the group was the performance of its subsidiary, GLS. This saw revenues rise 22%, and adjusted operating profits reach £166m, up from £90m the year before. This helped offset many of the losses in the UK business and is therefore a major selling point of the company.

As such, there is some optimism around Royal Mail shares at the moment, and since the trading update, shares have risen around 20%. Of course, this has coincided with the general upturn in the market, but it’s positive news, nonetheless.

A change in direction?

One of the main things holding back the stock over the past few years has been the performance of its UK operations. At the moment, the company relies on expensive manual labour to sort items. Any attempts to modernise have also encountered stiff resistance from trade unions. Another issue is the significant decline in letter volumes over the past few years, which has placed a strain on the Royal Mail share price. Letter volumes are also likely to continue decreasing over the next few years.

In order to address these problems, the delivery service has committed to two automated parcel hubs in the North West and the Midlands. This should greatly increase the efficiency of the service. Secondly, the company has also launched its own pick-up service, to capitalise on the rise in e-commerce. Although this is a crowded business, it still makes sense due to both the popularity of online shopping and the declining importance of letters.

Would I buy Royal Mail shares?

Although it has dealt fairly well with the pandemic, and there are development plans in place, I’m still not convinced with this stock. This is because it’s in need of major changes to return the UK business to profitability. As such, the current changes are too slow, and will allow other delivery businesses to take more market share. Opposition from trade unions may also hinder growth. For these reasons, I’m looking elsewhere.

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Stuart Blair 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.

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