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Here’s why I’m not buying Royal Mail shares in my ISA today

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Royal Mail (LSE: RMG) shares have had an impressive run. Over the last six months, the price has risen from 182p to 336p, which means investors could have made gains of 85%.

So will Royal Mail shares continue to rise? Let’s consider the investment case in detail.

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Coronavirus winner

Royal Mail has been a winner through the coronavirus pandemic. Government restrictions resulted in a significant increase in online shopping and the number of parcels being delivered to consumers.

The FTSE 250 stock played a part by delivering many of these packages, which has boosted its revenue. In fact, the company announced that for the first time ever, its parcels revenue is larger than its letters revenue. This is no surprise to me as sending letters has been in a secular decline.

Legacy problems dent Royal Mail shares

Royal Mail has had its fair share of problems, which have been raised to the surface once more by the pandemic and don’t help its share price. The company’s heavy reliance on its shrinking letters business and lack of investment in parcels infrastructure has resulted in poor growth.

These legacy problems go back years and have not been helped by a unionised workforce of the kind that many rivals don’t have. I believe Royal Mail’s challenges will take some time to resolve.

In May, CEO Rico Back stepped down with immediate effect in a surprise departure after less than two years in the job. He has been replaced in the interim by the Chairman, Keith Williams, a former CEO of British Airways.

Just like Back, the eventual permanent CEO will have to continue deal with the heavily unionised workforce over restructuring plans for the ailing business. Many decisions are likely to be unpopular with the unions and I expect the new company chief to have a huge job on their hands.

GLS unit

Other than Royal Mail’s core operations, it also has a small international General Logistic Systems (GLS) business, which focuses on delivering parcels globally.

Its latest interim results showed GLS revenue increasing by 22% and operating profit up by 85% at £166m. I expect this business to diversify and be the driver of revenue going forward. This division is now projected to deliver 21%-23% sales growth year-on-year for FY 2020/21.

Royal Mail shares have rallied on the back of some recent analyst upgrades. JP Morgan changed the stock to ‘overweight’ from ‘neutral’ with a price target to 374p from 253p.

Goldman Sachs, which has a ‘buy’ rating on Royal Mail, upped its price target to 290p from 230p. UBS, is another fan of the stock but has kept its price target at 215p. Yes, Royal Mail faces some structural challenges. But I believe the better parcel revenue trend has encouraged analysts to become positive on the company.

But while Royal Mail shares have been rising, I’m steering clear of the stock for now. Reducing costs and investing in technology, I believe, are the right steps for the business. But identifying the solution and executing the plan and two very different things. 

The dividend was suspended during the pandemic and I expect more restructuring delays due to a reluctant workforce. Royal Mail’s track record doesn’t give me much confidence. 

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Nadia Yaqub 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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