Around this time last year, I turned positive on the outlook for the Royal Mail (LSE: RMG) share price. I believed that while the company was suffering from a substantial decline in the number of letters posted during the pandemic, it should benefit from a surge in parcel deliveries.
That’s exactly what has happened over the past 12 months.
An increase in the number of parcels being delivered, coupled with substantial changes management has made to pick-up and delivery services, have helped the company report a surge in profitability.
The Royal Mail share price has reflected this growth. Over the past 12 months, the stock has returned around 230%. Over the same period, the FTSE All-Share has returned just 17%.
However, after this smashing performance, I think the company’s fortunes could be about to change.
Royal Mail share price outlook
I cannot deny that Royal Mail has reported outstanding growth over the past 12 months. As noted above, the company has benefited from an increase in parcel volumes throughout the pandemic.
Unfortunately, at this stage, it’s challenging to tell if this trend will last. As bricks-and-mortar stores have reopened around the country, consumers have returned to in-person shopping. This could lead to a decline in e-commerce activity, leading to a lower number of packages shipped.
Indeed, the company itself is worried about what the future holds. As a result, it didn’t give profit guidance for the current fiscal year when it published its results for the 12 months to the end of March earlier this month.
What’s more, the need for reinvestment in its operations means the firm could spend as much as £400m this year on capital projects. While this spending will be covered by the bumper profits reported for 2020, I think it shows the group’s challenges.
Still, last year’s profits have helped transform the business. Strong free cash flow meant net debt fell 59.6% to £457m. And as noted above, a high level of free cash flow last year (£800m) has left the group with plenty of capital to reinvest.
By modernising operations, the company may be able to reduce costs and improve efficiency, which would be positive for profitability and the Royal Mail share price.
The additional capital may also provide more firepower for the group to expand its international division. Royal Mail’s international business, GLS, reported revenue growth of 28% last year.
The bottom line
Considering all of the above, I have mixed feelings about the Royal Mail share price. The company has the potential to continue to grow in 2021 and beyond, but nothing is guaranteed.
Moreover, after the stock’s recent performance, the shares are starting to look slightly pricey.
Overall, I wouldn’t buy at today’s price and if I owned it now, I’d take profits after the stock’s recent performance. The company’s profits may continue to expand, but after a 230% gain in 12 months, I would sell and look for growth elsewhere.
