Royal Mail share price is rising: 3 reasons to avoid IDS stock

IDS (LON: IDS) share price has staged a cautious comeback in the past few weeks. Shares of Royal Mail’s parent company jumped to a high of 220p, the highest point since May 19th. The stock has jumped by over 14.7% from the lowest level in May this year. Here are some of the top reasons to avoid Royal Mail shares.

Revenue growth falling

The most basic reason why investors should avoid Royal Mail shares is that its revenue and profitability have dropped sharply in the past few years. The most recent reports showed that the company’s revenue dropped by 12.8% in the nine months to December 2022. In its statement, the firm cited the overall structural decline in letter and retail sales.

Its total revenue dropped by 6.1% while its parcel revenue fell by over 17%. Sadly, the company believes that its business conditions will not improve this year. The company believes that its operating loss will be between £350 million and £450 million. 

Therefore, while the company reached a deal with its workers, it’s hard to see how Royal Mail will return to growth.

Strained balance sheet

The other main reason to avoid Royal Mail shares is the company’s balance sheet. Data shows that the company’s debt has risen in the past three years. Its total debt stood at over $2.97 billion by March this year, up from the previous $2.90 billion. It had $0.7 billion in debt before the Covid-19 pandemic.

Therefore, with UK’s interest rates rising, there is a likelihood that the company will spend more money on interest payments. This, in return, will mean significant losses and margin compression.

IDS’s inefficiencies

Meanwhile, you should avoid IDS because of its inefficiencies. For one, like America’s USPS, the company is mandated by law to deliver letters throughout the country. While this is a good thing for customers, it is costly for Royal Mail since it delivers letters to some highly unprofitable places.

At the same time, as I have written here, I believe that IDS is vastly overstaffed. The company has over 130k employees and it generated over £12 billion in revenues in 2022. This means that IDS makes about £92,307 per employee. 

In contrast, Deutsche Post generates about $182k per employee. UPS and Fedex, which are bigger companies than Royal Mail, make $184k and $484k revenue per employee. Therefore, for IDS to become profitable, it needs to cut costs, which is not an easy thing because of the strength of the union.

There are other reasons to avoid IDS stock. For example, the company is facing strong competition from the likes of Yodel, Hermes, and Fedex among others.

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