Royal Mail (LSE:RMG) shares are down almost 15% over the past month. As part of the global equity selloff, the postal service hasn’t been immune to the shift in investor sentiment. It’s also struggled with a trading update this week. However, we do note that some stocks have been caught up in the broader slump without having a fundamental reason for doing so. Tighter monetary policy and rate hikes are a hurdle, but we think that the move in Royal Mail shares has been overdone. Here are a few reasons why we like the company right now.
Entering 2022 in a position of strength
With many large corporates struggling through the pandemic, Royal Mail was one of the select group that performed well. In fact, when you look at the two year share price returns, a gain of 119% would have been made. The company benefitted from a surge in parcels as many of us worked and were constrained to our homes. As a result of this, profitability increased, even with the tight margins made on deliveries. For example, in the year ending March 2021, adjusted operating profit was £702m, up from £325m the year before.
Therefore, as we come into 2022, the business is in a good position, in contrast to some others. We did note the news earlier this week of the revision lower in profit levels expected for this year. However, this is partly due to the shortage of staff due to Covid-19 over the Christmas period. It said that some 15,000 staff were off at some point during that period.
Due to the slump over the past month, Royal Mail shares now trade down at 438p. This gives a price-to-earnings ratio of just under 5. In our opinion, anything under 10 represents a potentially undervalued stock within the FTSE 100. So a figure of 5, it does raise eyebrows.
Clearly, if you feel that the further need to restructure and cut costs is going to cause more pain for the business, then you might want to pass. Yet we think that as a long-term play, the ratio is just too low. The company is profitable, and looking beyond the cost cutting will make the business even more fiscally lean. This will enable it to be more nimble and better compete in the marketplace.
In the trading update, the business noted that “the acquisition of Rosenau Transport in Canada was completed on 1 December 2021 after having received regulatory approval.” This adds to global coverage for the group, having already got a strong presence in Europe via GLS. The main countries covered here include Germany, Netherlands and Belgium. With the UK serviced by Royal Mail, I like the build out over time of global operations.
This should help Royal Mail shares to move higher in the long run as the business becomes less and less dependent on one market to provide profitability.
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