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The Royal Mail (LSE: RMG) share price has nearly doubled since this time last year. In September 2020, it was at 240p. Then increased demand for its services saw the share price hit a high of 606p on 8 June, before slipping by 22% to 472p today.
So does this dip represent a buying opportunity, or could it fall even further?
Trading update
Last Thursday, Royal Mail posted a trading update that saw a mixed investor reaction. Yes, the share price has dipped a little further. But the overall tone of the update was broadly positive. Chairman Keith Williams said that between April and August the group “saw continued revenue growth across the Group, with both Royal Mail and GLS reporting higher revenues than the prior year.”
The numbers back him up. Overall revenue grew by 8.2% year-on-year and by 17.7% compared to the same period in 2019. This is largely thanks to increased parcel sales; Royal Mail parcel revenue was up 34%, and volume up 18% compared to 2019. This is especially important for the company’s growth, as parcels now make up a majority of the group’s sales. And Williams is “confident that domestic parcels are re-basing at a significantly higher level than pre-COVID.”
I think this is great news for the Royal Mail share price. Over the past two years, repeated lockdowns saw all but essential stores close. Every consumer — including me — relied on parcel deliveries to get goods. And this increased business for Royal Mail was responsible for its soaring revenue.
A key concern was that post-pandemic, parcel deliveries would rapidly slow down. But it seems that higher demand for parcels might be here to stay. Accordingly, H1 2022 fiscal year profit is projected to be between £395m and £400m. And this is significantly higher than pre-pandemic levels.
Then why the dip now?
As noted above, the company’s revenue growth has relied on the increased demand for parcels. But when a company’s focus narrows down to one service, it leaves itself vulnerable in case there’s a slowdown. And this seems to be the case here.
The company is putting a positive spin on its trading update by focussing on the past five months as a whole. But parcel deliveries across the group actually dropped by 9% in July and August. While the company is blaming the decline on the summer weather, there’s the risk that parcel demand will continue to fall as the pandemic subsides. And the company accepts that there’s “significant short-term uncertainty.”
There’s also plenty of competition from other parcel delivery couriers. And the company has suffered in the past from strike action. That’s a concern for any long-term investor.
My verdict for the Royal Mail share price
E-commerce has continued to grow since the Royal Mail IPO in 2013. And consumer habits may have changed permanently over the past two years. So I think further long-term growth is possible.
But it’s likely that the Royal Mail share price’s trajectory will be determined by its next update on 18 November. It will either show that parcel deliveries rose after the summer slowdown, or that they continued to fall. And the latter possibility could see the share price drop dramatically.
I think it’s a case of wait and see for me.
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Charles Archer 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.
