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The past couple of years have seen soaring demand for delivery services. That has been good for Royal Mail (LSE: RMG). The Royal Mail share price began this year at more than double where it stood two years ago.
Below I consider what might happen in the coming year – and whether the shares could reach a new high.
Strong demand tailwinds
The company has benefitted from strong demand over the past couple of years. Business has been good, with shareholders set to receive a 20p per share special dividend this month alongside the interim dividend. The company has also been buying back shares. That should reduce the share count and so push up earnings per share.
At the interim stage, the company announced revenue growth of 7.2% compared to the same period the prior year. Basic earnings per share were 27p, up from 1.4p.
2022 outlook
The company’s outlook for the current year is also positive. It expects around £500m of adjusted operating profit at the Royal Mail division. That compares to £344m in the company’s most recent full-year results. In the General Logistics Systems business, the company forecasts modest revenue growth and an operating profit margin of around 8% in 2022. That is a bit of a fall from last year’s 8% adjusted operating profit margin. So I think earnings in that business division could be lower than the prior year. I expect that to be more than compensated for by the sharply improved outlook in the Royal Mail business, however.
Last year’s earnings per share of 62p were almost four times as much as the previous year. Based on the company’s guidance for 2022, I think we could see the same or better this year. That would put the shares on a forward price-to-earnings ratio in the single digits. That looks cheap to me. Bargain hunters in the stock market could help drive the share price higher.
But I also see long-term structural reasons to support a higher Royal Mail share price. The recent strong performance in Royal Mail could continue in coming years, I reckon. The growth in demand for parcel delivery – which is already over 70% of the total company revenue – could help drive turnover growth.
There are risks, though. The company has pointed out that higher labour costs and shorter working hours in 2022 could combine to drive up costs. That might hurt profits. I am also fearful of strong price competition in the parcels business driving down profit margins.
Could 2022 see a record Royal Mail share price?
The Royal Mail share price has climbed 44% in the past year, at the time of writing this article yesterday. But it still sits 18% below the high point it hit back in May 2018.
If earnings news stays strong, the company boosts its dividend again thanks to higher profits, and margin pressure in the parcels business eases, I reckon the investment case will strengthen. So I think it is possible that the shares could reach their previous high price once more in 2022.
But I think it is only a possibility. Strong earnings growth is already priced in by many investors, so it will be hard for the company to surpass their expectations. Margin pressure in parcels could get worse not better. A record share price might happen — but equally, it could get lost in the post.
Christopher Ruane 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.
