Have Royal Mail shares passed their peak?

Royal Mail shares have been struggling recently and Rupert Hargreaves thinks he knows why the stock has started to underperform since June.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young lady working from home office during coronavirus pandemic.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Last year, Royal Mail (LSE: RMG) shares charged higher as the company benefited from a boom in parcel delivery volumes. However, over the past few months, the stock has come off the boil. Investors have started to avoid the business as growth has slowed. 

This presents an interesting dilemma. While Royal Mail has undergone a significant transformation over the past 24 months, the company’s growth is likely to slow as we advance. This may lead the market to re-evaluate the business and push the stock lower as a result. 

The question I want to know the answer to is, could it be worth taking advantage of recent declines to buy Royal Mail shares? 

Company under pressure

Over the past 12 months, shares in Royal Mail have added 160%. Unfortunately, since the beginning of June, the stock is off around 17%.

The sell-off in the company’s shares accelerated after it published its latest trading update towards the end of July. This was broadly positive, but one number stuck out. Parcel volumes declined 13% year-on-year in the fiscal first quarter.

Still, volumes were 19% ahead of pre-pandemic levels and parcel revenue increased 3.4% year-on-year overall. However, it suggests some of the growth the company experienced last year may not be sustainable. And that seems to me to be the reason why the market has been dumping Royal Mail shares recently. 

Another factor is the company’s own forecast that it will be spending £400m over the next year in the UK alone on capital projects. That is a big chunk of cash. The spending will almost certainly have an impact on profit margins and the group’s balance sheet. 

The outlook for Royal Mail shares

In the middle of last year, I turned positive on the stock as it became clear that the group was benefitting from a surge in parcel delivery volumes. I changed my opinion earlier this year when the economy started to reopen.

As the economy reopened, I thought e-commerce demand would decline, and consumers would be able to deliver personal packages, such as birthday gifts, in person. 

Initial indications appear to show this is just what’s happened. As such, it seems to me that the business and the stock have both entered a consolidation phase. Royal Mail is using its windfall profits from 2020 to reinvest in the business. At the same time, organic growth has slowed. 

In the long run, as the e-commerce market continues to grow, I think the demand for the company’s parcel services will only expand. Nevertheless, we could see some uncertainty and volatility in the near term. 

Therefore, while I’m optimistic about the long-term outlook for Royal Mail shares, I wouldn’t buy the stock today. I want to see how the company performs in the next year or so, and navigates its current challenges before initiating a position. I think the stock has passed its peak for now, although it could return to previous highs in the future. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »