The Royal Mail share price is up 230%: what next?

The Royal Mail (LSE: RMG) share price has tripled over the last year, delivering a gain of 230% for lucky shareholders.

Last year’s low share price wasn’t just down to the pandemic either. Royal Mail shares had been struggling below 250p since May 2019, as management wrestled with problems at the postal operator.

However, business has boomed during the pandemic as parcel volumes surged. But I think there’s a chance life will get a little tougher over the next year.

Right place, right time

I reckon the pandemic has probably saved shareholders from several years more pain. Royal Mail’s share price rocketed last year, as it became clear that surging parcel volumes would boost revenue and profits.

According to the company, revenue for 2020/21 is expected to be more than £900m above last year. And adjusted operating profit is expected to be “around £700m”, compared to £217m in 2019/20.

Overall, my feeling is that the impact of the pandemic has probably helped new CEO Simon Thompson to accelerate much-needed changes to the business. That’s good news — but what happens next?

I’m not getting carried away

Royal Mail’s results for the year ending 29 March are likely to be much better than originally expected. But I don’t think the company is through this difficult period quite yet.

I think it’s fair to assume that some of our home shopping habits will continue after lockdown when non-essential stores reopen. Of course, we’ll see shoppers return to physical shopping, especially in the early days of post-lockdown. So I think growth in parcel volumes will slow sharply. We might even see a slight fall in parcel numbers.

A second concern is the risk of industrial action. The threat of strike action in 2020 was lifted when the UK went into lockdown last March. But Royal Mail still needs to push through big changes in its operations. I suspect that job cuts could still be necessary too.

Royal Mail share price: I’m not buying

Broker forecasts for the year ahead suggest Royal Mail’s revenue and pre-tax profit could fall slightly, before returning to growth in 2022/23.

Story continues

These forecasts value the stock on around 11 times earnings. Although the dividend was cancelled last year, I expect the payout to return during the coming year, with a yield of perhaps 4%.

Royal Mail appears to be in better shape than I would have expected on year ago. But I’m not sure the shares are all that cheap anymore. This is a large, mature business that operates in a competitive sector where profit margins are low. Staff costs are much higher than at many rivals.

These challenges aren’t going to disappear, in my view. Although I think Royal Mail will adapt and survive, I think the share price already reflects a positive outlook. I won’t be buying the stock at current levels.

The post The Royal Mail share price is up 230%: what next? appeared first on The Motley Fool UK.

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Roland Head 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.

Motley Fool UK 2021