The performance of Royal Mail (LSE: RMG) shares over the past 12 months has been outstanding. The stock has risen in value by nearly 200% since the middle of May last year. This makes it one of the best-performing stocks in the FTSE All-Share, according to my research.
I think Royal Mail has come into its own over the past year. As the business embarks on its next stage of growth, I’d buy the stock for my Stocks and Shares ISA right now.
The outlook for Royal Mail shares
During the pandemic, many businesses have had to make significant changes. Nowhere is this more apparent than at Royal Mail. Last year, the company bought in some of the most significant in its long history.
One of these was the introduction of a 72p parcel pickup service. The firm said it was “one of the biggest changes to the daily delivery since the launch of the post box in 1852.”
The impact these changes have had on Royal Mail shares, and the firm’s profits and outlook, have been immense.
In a trading update published at the beginning of February, Royal Mail heralded its busiest quarter for parcel deliveries in its history. On its busiest day, the company delivered 11.7m parcels, 32% more than the most active day during the first national lockdown in 2020.
As demand for parcel shipments has exploded, parcel revenues have also increased. For the nine months to the end of December, Royal Mail’s parcel revenues totalled £3.8bn, up 37% year-on-year. This more than offset a 16% decline in letters revenue.
Overall, group revenue increased 13.5% year-on-year. Based on this trading, the company now expects to report operating profit “well in excess of £500m” for its current financial year.
Risks and challenges
I don’t think this boom in parcel income will last forever, but I believe Royal Mail will see a lasting impact from the pandemic.
The company will be able to use the excess profits to strengthen its balance sheet and invest in the business. It has already been doing the latter to boost parcel sorting volumes. As we’ve seen, this has already had a positive impact on Royal Mail shares.
As the e-commerce market continues to blossom, I think at least some of the growth in parcel revenues will last. As the largest and most recognisable delivery company in the UK, I believe Royal Mail will benefit disproportionately from the booming digital market.
That said, I think it’s unlikely the group will experience uninterrupted growth over the next few years. The firm has always had rocky relations with its workers. Trouble could start brewing any moment. There’s also competition to consider. The group is facing increasing competition from other delivery companies which can pick and choose their markets. This may allow them to offer a better service at a lower cost.
Even after taking these risks and challenges into account, I’d buy Royal Mail shares for my Stocks and Shares ISA today. I think the company’s pandemic profits will provide a boost to the enterprise that could support growth for years.
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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.