As the Royal Mail share price surges, I’m unconvinced

2023-07-26 11:33:48 ET

IDS (LON: IDS) share price has outperformed the market this year even as concerns about the company’s future continue. The stock has jumped by over 20% while the FTSE 100 index has risen by less than 3%. It is hovering at the highest level since September 12th of last year. In all, the stock has jumped by more than 54% from the lowest level in 2022.

Royal Mail concerns remain

International Distributions Services, the parent company of

Royal Mail

and GLS, has done well this year as investors react to the recent deal with its workers. The deal will see the company spend more money in wages. At the same time, IDS will see no more strikes this year.

Despite this optimism, I am still concerned about the company. For one, its core letters business in the

UK

is not expected to see any meaningful growth this year. The volume of letters in the first quarter came in at 1.7 million, down from the previous 1.856 million. Its volume stood at 2.4 million in 2019. Therefore, the trend is not encouraging.

At the same time, its parcels business is not expected to grow. Its total parcels in the first quarter came in at 283 million, down from 314 million in the same period in 2022. Most importantly, its

volume

was lower than the 310 million it made in 2019 before the pandemic. The only bright spot for the company is GLS, whose volume rose to 219 million.

The other good thing is that the company’s revenue rose by 14% to over 3 billion pounds. However, I suspect that Royal Mail’s parent company growth will either be moderate or even decelerate. This view was reiterated by analysts at Liberium Capital who said:

“In our view, any business that does not have the ability to raise prices in the current inflationary environment is not only in trouble in the short term (given the likely margin squeeze), but also in the long term.”

Royal Mail share price forecast

IDS chart by TradingView

The daily chart reveals that the IDS stock price has made a strong comeback in the past few weeks. It has moved above the important resistance point at 260.3p, the highest point on April 25th. Another bullish fact is that the stock has moved above the 25-day and 50-day moving averages.

However, oscillators like the Relative Strength Index (RSI) and the Stochastic Oscillator have moved to the overbought level. Therefore, while the stock has some more upside, I believe that the long-term outlook is bearish. If this happens, the target for the stock is 215.7p, the lowest point on March 16th.

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IDS: As the Royal Mail share price surges, I’m unconvinced

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