I remember buying Royal Mail (LSE:RM) shares in the initial subscription period back in 2013. It wasn’t a long-term play for me back then, and after the Royal Mail share price rallied to 600p after only a few months, I sold out. Since then, I’ve always had one eye on the share price. It fell after that early rally but managed to bounce back to 631p in May 2018 before a steady decline set in.
In that time, I’ve increasingly doubted that Royal Mail can be a successful business in the private sector. It’s a service, almost a public good, that was once provided by the government. In a similar way to national defence and healthcare, private sector companies can struggle to be financially viable in this area.
But in recent months, the Royal Mail share price has gone from bottoming out around 130p in March and headed higher ever since. With a share price of almost 420p at Monday’s opening, it’s doubled in value over the past year. If I’d bought at the March low, I’d have gained around 220%. Would I buy today though?
Reasons for the Royal Mail share price gains
To better understand these moves, I need to look at the mid-term drivers first. Last summer, the company announced that it was starting a large restructure of the business. The letters market was still falling, but the more lucrative parcels sector was something Royal Mail wanted to shift towards. With the impact of the pandemic, the need to survive meant this restructure was brought forward.
As part of the shift, it announced over 2,000 job cuts. That’s expected to be completed by March and to save £130m, with other spending cuts and a continued move towards automation meaning lower costs going forward. The share price was negatively affected in the short term, which is natural. Now that we’re several months down the line, the share price is feeling the benefits from the change of direction.
For the half year through to the end of September, revenues were up 4.9%, driven by parcels growth of 33.2%. Despite recording a loss, the outlook for the full year is better, with a revision higher on revenue projections. If realised, the business would break-even, it said. This boosted the share price.
Other recent positives include a settlement with workers in December for a 3.7% pay rise. Added to this was the announcement of Simon Thompson just a couple of weeks ago as the new CEO.
Where do we go from here?
All of the above factors are driving the share price higher in the short term, with good momentum. In fact, I think the outlook is positive for the future, so would consider buying the stock. It seems the management team is finally waking up to the concept that as a publicly listed company, it needs to be more focused on the finances. The shift in strategy (sped up by Covid-19) seems to reflect this wake-up call.
Of course, it’s a risky company, one that’s currently loss-making. High volatility can easily see large short-term corrections lower. Such investments aren’t suitable for everyone and if I buy, it’ll be for the long-term, ignoring near-term fluctuations.
