This disappointing performance continued yesterday morning as its price fell 5% after the release of the group’s trading update. The stock recovered to close the day, finishing at around 286p.

But will this recovery continue? And is now the time to be buying some shares?

Royal Mail results

The company released its Q1 update yesterday. And its dire outlook provides little optimism for shareholders.

Royal Mail revenues fell by 11.5% year-on-year to under £1.9bn, while the group’s revenues fell by 5.1%, as factors such as falling deliveries of Covid-19 test kits saw the firm take a hit.

It also said its adjusted operating loss stood at £92m, pinning this to a “disappointing performance on delivery of further efficiencies.” While the “inflexibility in the cost base to adjust to lower volumes” also saw this impacted.

There were a few positives, however, with the most notable spawning from its international business, GLS. The subsidiary posted an operating profit of £94m. It also remains on target for high single-digit revenue growth.

Further woes

The underwhelming set of results is not the only issue the business currently faces, as it goes toe-to-toe with the Communication Workers Union (CWU) regarding employee pay rises to keep up with the cost-of-living crisis.

The two parties have failed to come to an agreement after negotiations. And yesterday it was announced that 115,000 Royal Mail workers voted in favour of walkouts. With a 77% turnout, 97.6% of members backed strikes.

No dates have been set for the strikes, as it’s hoped one last push for a “straight, no strings” pay rise may see an agreement reached. But should the strikes occur, this could drag the Royal Mail share price down.

Not all bad

Despite these headwinds, there’s reason to see value in the current Royal Mail share price.

Firstly, the stock currently trades on a price-to-earnings ratio of 4.67. This falls well within the ‘value’ benchmark of 10. And to me signifies that Royal Mail may be undervalued.

On top of this, it currently offers a chunky dividend yield of 5.8%. With inflation reaching 9.4% in the UK for June, this offers me some protection against rising rates. With stagnant cash losing value, this could be a smart move.

However, the business does sit on a large pile of debt. With interest rates seemingly set to continue to rise, this could hold the firm back going forward.

Will it recover?

I think the Royal Mail share price may fail to recover in the times ahead. The firm faces mounting pressure from the CWU. And with inflation continuing to bite, a weak economic outlook may see it suffer this year. While its low valuation and substantial dividend yield are tempting, I won’t be buying Royal Mail shares right now.

The post Will the Royal Mail share price recover? appeared first on The Motley Fool UK.

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Charlie Keough 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.

Recent results

The recent Q3 results were a mixed bag. From a positive standpoint, the company’s guidance remained unchanged, and it expects around £500m adjusted operating profit for FY21/22. In addition, the performance of European subsidiary GLS continues to impress. In fact, in euro terms, it expects 9% revenue growth, and operating profit margins of around 8%.

On the other hand, there were some key worries to point out, and it’s these factors that have caused the Royal Mail share price to drop. Firstly, there were some signs that demand for parcels was starting to wane, in comparison to pandemic levels. Indeed, in the third quarter, parcel volumes declined 7% year-on-year, and parcel revenues declined 4.9%. Any decline is clearly not good news for the company, even though parcel demand remains higher than pre-pandemic.

Secondly, costs at the company are soaring. For example, in January around 12% of the workforce was off sick. This meant that the company has had to spend more on overtime, additional temporary staffing, and sick pay. Year-to-date, this has cost it around £340m. As such, there’s a risk that profit margins will be strained.

Rising inflation is also likely to lead to higher wages, which is one of Royal Mail’s main costs. The strength of the Communication Workers Union may be a key factor here. A strong trade union may mean management has to concede more than its rivals need to. Plus, management-worker relations have often been difficult at the firm. This is another factor that may strain profits for the group.

Is the Royal Mail share price too cheap?

From a valuation viewpoint, the Royal Mail share price does seem far too cheap to me. In fact, it has a price-to-earnings ratio of just 4.5, which is far lower than the average P/E ratio among FTSE 100 stocks of around 15. In addition, its price-to-sales ratio is just 0.3, once again far lower than the average FTSE 100 stock.

Such low valuations lead me to believe that Royal Mail shares are now far too cheap. Although there’s a risk that profits may fall slightly this year, it already seems factored in to the company’s valuation. The presence of GLS, which is seeing consistent growth year-on-year, offers another compelling for me reason to buy shares. Therefore, this is a stock I’m very tempted to add to my own portfolio.

The post Down 30%, is the Royal Mail share price a no-brainer buy? appeared first on The Motley Fool UK.

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Stuart Blair 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.

Tremendous recent performance

In the first half of its FY21/22 financial year, Royal Mail’s performance has been excellent. Indeed, while revenues only rose 7% year-on-year, operating profits reached £311m. This is compared to an operating loss of £20m the year before, which was caused by restructuring charges and negative impacts from the pandemic. As such, the company’s recovery has clearly been very strong.

This has also allowed it to return a significant amount of money to shareholders, including an interim dividend of 6.7p and a special dividend of 20p per share. The firm also announced a share buyback programme of £200m, demonstrating its strong financial position. As such, the recent rise in the Royal Mail share price seems justified to me. A similar performance next year could see it rise even further.

Is the share price undervalued?

From a purely valuation perspective, the Royal Mail share price does look fairly cheap. Indeed, the group reported basic earnings per share of 27p in the first half of the year, and if it can perform in a similar way in the second half of the year, this would give the shares a price-to-earnings ratio of under 10. This illustrates that they may be too cheap and have space to rise in 2021.

It’s also important to consider GLS, Royal Mail’s subsidiary, when valuing the company. This is the company’s international business, which covers both North Europe and North America. While GLS produces far less revenue than Royal Mail, its profitability is around the same. The company also estimates that GLS operating profits will total around €500m in FY24/25. As such, this business could be a key driving factor for the Royal Mail share price.

Nonetheless, there are some factors that may hold the shares back. For one, wage inflation is a very large problem for Royal Mail, because around half the company’s operating costs are staff costs. There are also some barriers to its modernisation programme. This is due to pressure from trade unions, which have in the past blocked Royal Mail from cutting costs. This included preventing the company from making any compulsory redundancies. These factors may see operating profits decrease over the next few years.

What am I doing?

Despite these risks, I still believe that the Royal Mail share price has upside potential heading into 2022. The pandemic seems to have quickened the transition into e-commerce, and this should benefit Royal Mail and other delivery companies.

Despite the hurdles posed by trade unions, a modernisation programme is still in process. This is expected to lead to around £100m in annual savings. This should help offset any additional costs caused by wage inflation. Therefore, while I don’t think the company can replicate its 2021 performance, there still seems to be space to rise next year. Therefore, I may buy some Royal Mail shares.

The post Will the Royal Mail share price rise further in 2022? appeared first on The Motley Fool UK.

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Stuart Blair 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.