The Royal Mail (LSE:RMG) share price has fallen substantially over the course of the last year. In fact, it is down 35% over the year and even further off its summer 2021 peak. The stock reached 612p a share last June before falling. Royal Mail closed at 329p a share on Monday afternoon.
Personally, I’m rather confident about the Royal Mail’s long-term prospects. There are some short-term headwinds but I think the group has the capacity to overcome these issues.
What’s behind the fall?
There are two main factors that have contributed to the falling share price.
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The first is that revenue fell year-on-year, albeit by single-digits, as parcels volume decreased, according to a January statement. However, the data shows the firm is still performing ahead of pre-pandemic levels. While the falling volume hardly seems surprising considering the unique environment that the pandemic created, the FTSE 100 company will hope this downward trend isn’t sustained.
Secondly, there’s pressure on wages. Royal Mail is in a dispute with workers and unions who have requested that pay is increased in line with the record inflation seen in recent months. Wages represent one of Royal Mail’s greatest costs.
These issues have been compounded by brokerage downgrades. Last week, Liberum downgraded its stance on Royal Mail to “sell” from “hold“, exacerbating the share’s fall over the last year.
Why I’m upbeat on Royal Mail
I’ve recently bought shares in Royal Mail. With a price-to-earnings ratio of just 6.3, it’s certainly not expensive, but I’m also content about the company’s long-term strategy.
Next year, Royal Mail is planning to spend £400m as part of its plans to automate its business. Getting the infrastructure in place is clearly expensive, but in the long term it will reduce labour costs.
One area in which this transition is already happening is parcel processing. Just a few years ago, the vast majority of parcels were sorted by hand. Fast forward to today, that figure is closer to 50%. This marks a considerable shift away from the labour-intensive process of sorting by hand.
Despite falling parcel numbers over the last year, I think there’s long-term growth for the brand in parcels. The pandemic helped the British postal group in making this transition. The area offers greater margins than traditional letters.
I’m also confident about long-term demand for parcel services from e-commerce, especially as high street shops close around the country. Royal Mail already has a dominant market share and should be well positioned to benefit from this trend.
As discussed, inflation and notably the impact of rising wages, will hurt near-term profitability. But broadly speaking, I feel this won’t be a long-term headwind.
I bought Royal Mail this week, and while the 3% dividend is ok, I’m interested in this stock’s upside potential.
