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Royal Mail (LSE: RMG) is as quintessentially British a company as Lloyds or Rolls-Royce. It’s a part of the commercial furniture of the UK. But behind the familiar red vans that we’ve come to associate with parcels and letters delivery lies an impressive company from a financial perspective. Last Friday though, shares of Royal Mail were down 5%. And despite a rise on Monday, they still haven’t recovered. There may not be reason for alarm just yet, but the stock did go up 49% last year. So why has it seen a rocky start to 2022?
Delays and JP Morgan
Nobody likes it when the letter or parcel they’re expecting (or sending) arrives late. It’s just human nature — we want our stuff and we want it now. Investors seem to agree. Royal Mail is currently experiencing delays across at least 128 postcodes in the UK. The reason is that the company is understaffed in certain areas due to the ongoing pandemic. Such news has appeared more and more often since December. This has reportedly prompted the JP Morgan subsidiary, JP Morgan Cazenove, to reduce its profit forecast for the company by 6%-7%.
This, and general negative feelings about the disruptions, is probably what the market was reacting to on Friday when investors knocked that 5% off Royal Mail’s share price. JP Morgan believes that its staff problems are going to affect the ability of the business to operate optimally over the next few months. It speculates that of its 1,200 delivery offices in the UK, 77 of them are currently experiencing “material difficulties with service levels”. This is up from just 20 at the end of last year.
The underlying business
Despite the delays, Royal Mail has enjoyed some exceptional returns through the pandemic. Earnings for the first half of the 2021/22 fiscal year were released in November and showed basic earnings per share were up to 30.3p from 0.4p in the same period a year earlier. Domestic parcel volumes improved by 33%, a reflection of how Royal Mail has risen to the challenge of more and more online shopping. Revenues were up 7% and profits were 10% higher too. The question remains though: is now a good time for me to buy this stock?
To buy or not to buy
Royal Mail has certainly seen an impressive last 24 or so months. It’s hard to ignore the all-around growth the company has been experiencing. It’s also hard to ignore the fact that the company is going to have to keep shelling out overtime payments to staff who are still working while maintaining its relatively generous sick pay to those who have come down with Covid-19 or have to isolate due to contact with sufferers.
I feel there is still some real value to this stock though. If 2022 is indeed the year in which we get the pandemic under control, RMG’s issues could soon be a thing of the past.
With a price-to-earnings ratio of just 5.69, this stock looks good value and is hard for me to pass up. While I remain cautious, it is a stock I would buy in 2022.
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Stephen Bhasera has no position in any of the shares mentioned. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended Lloyds Banking Group. 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.
