The Royal Mail (LSE:RMG) share price fell by 4% in early trading on Wednesday morning. The company is down a whopping 37% over the past three months. In fact, the stock is down nearly 50% compared the levels achieved last summer.
Royal Mail operates an air, rail, and road network to move letters and parcels around the UK. Packages are moved between its distribution hubs, mail processing centres, and delivery offices before they reach their final recipient.
What’s behind today’s drop?
Royal Mail lost ground on Wednesday after Barclays cut its price target. The bank said current uncertainties and active union negotiations were weighing on the shares. It also cut its estimates for Royal Mail’s earnings before interest and taxes for FY23 by 40% on weaker trade prospects.
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Royal Mail also warned customers on Wednesday of fresh service delays that may impact some postcodes more than others. The London-headquartered firm has been experiencing pandemic-related issues for some time. Issues raised at the beginning of the year, such as Covid-19 induced staff absences, are continuing to impact operations.
The warning came after the Royal Mail increased the price of a first class stamp by 10p to 95p on Monday. Second-class stamps have increased by 2p to 68p.
The group justified the move by saying that there had been a long-term decline in letter usage, coupled with rising inflation. The volume of letters posted has fallen by more than 60% since its peak in 2004-05. Volume is also down 20% since the start of the pandemic.
Should I buy Royal Mail shares?
Shares in Royal Mail have fallen to around 318p at the time of writing from highs of over 600p last summer. Russia’s invasion of Ukraine contributed to the fall and this was exacerbated in March when Liberum downgraded its stance on Royal Mail on Wednesday to “sell” from “hold“. Liberum set a target price of 355p a share.
However, I think there are reasons to be positive about Royal Mail. The pandemic gave the company the chance to speed up its transition to parcels, and this has happened. The massive increase in parcel numbers should help the group transform its revenue.
Just a few years ago the majority of parcels being processed by Royal Mail were being sorted by hand. Now, that number is around 50%, representing a considerable change and one that should bring cost-saving benefits.
The 3.1% dividend isn’t exactly world-beating, but I think the stock is trading quite cheap. The company has a price-to-earning ratio — a metric for determining a company’s value relative to its earnings — of just 6.3. To me, this suggests the company is good value for money.
Moving forward, like any other business there will be challenges for the Royal Mail Group. One issue is rising inflation and its impact on wages. Wage inflation could eat into the company’s margins. This may be exacerbated by a strong union.
I actually think the long-term prospects for this stock outweigh the near-term risks. For me, Royal Mail looks like a good long-term buy and I will be adding it to my portfolio.
