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Could the Royal Mail share price crash to under 100p?

05 Mar 2020, 15:46

https://www.fool.co.uk/investing/2020/0 ... nder-100p/

The Royal Mail (LSE: RMG) share price has fallen a staggering 32% over the past 12 months. Over the past three months, the stock has underperformed the FTSE 100 by 18%. Both of these figures include dividends.

After these declines, it’s clear that shares in the postal service look cheap compared to their history. However, from a fundamental perspective, the stock continues to look expensive.

With this being the case, it seems highly likely the shares could fall further throughout the remainder of 2020.

Overpriced
Royal Mail’s main problem seems to be to a lack of growth. People just aren’t sending letters anymore, and although parcel volumes have exploded over the past decade, this growth hasn’t been enough to make up for the decline in letters.

At the same time, the group has had to grapple with higher costs. Capital spending has also weighed on the firm’s profit margins.

Analysts expect this trend to continue for at least the next two years. The City believes Royal Mail will earn just 21p per share in 2020, that’s down 55% from last year’s figure. On top of this, earnings of 11p per share are pencilled in for 2021, a further decline of 48%.

These figures suggest the stock could still be overvalued at current levels. Indeed, earnings of 11p per share for 2021 imply a forward price-to-earnings (P/E) ratio of 15.

In the past, the stock has changed hands for around 10 times earnings. That suggests a share price of 110p might be more suitable, based on the City’s current growth projections for the group.

The stock’s one redeeming feature is its dividend yield. At the time of writing, the shares support a dividend of 8.7%.

However, even this is likely to fall over the next two years as earnings per share barely cover it. As income continues to fall, management will have to make some tough decisions. This could include cutting the dividend further. Royal Mail cannot afford to continue to pay out more than it earns from operations in dividends to investors.

Bleak outlook
All of the above suggests the outlook for the Royal Mail share price is bleak. The company has been struggling to turn itself around for many years, and it doesn’t look as if it’s going to find a magic solution anytime soon. Relations with employees are only deteriorating, and so is the volume of letters handled by the group.

Royal Mail is also facing more competition in its key parcels market. Better funded and more efficient competitors are edging in on its turf, and this is only compounding the group’s problems.

As such, it might be better to avoid the stock. It’s unlikely to decline below 100p in the near term. Nonetheless, as earnings continue to fall, there’s nothing to stop the Royal Mail share price crashing below this level in the long run.

A top income share with a juicy 5% forecast dividend yield

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!

But here’s the really exciting part…

Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...

He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

Could the Royal Mail share price crash to under 100p?

05 Mar 2020, 17:36

Don't think the article takes into account the general loses on the Stock Market as a result of the Coronavirus

Could the Royal Mail share price crash to under 100p?

05 Mar 2020, 19:50

SpacePhoenix wrote:Don't think the article takes into account the general loses on the Stock Market as a result of the Coronavirus

I think it does because it says that in this period (the last 3 months) RM has underperformed the FTSE 100 by 18%.
(It's not just RMs value affected by coronavirus)
The whole market has been massively affected by coronavirus yet RM is still underperforming in comparison to the rest of the market.
Last edited by Rumple on 05 Mar 2020, 19:57, edited 1 time in total.

Could the Royal Mail share price crash to under 100p?

05 Mar 2020, 22:03

Rumple wrote:
SpacePhoenix wrote:Don't think the article takes into account the general loses on the Stock Market as a result of the Coronavirus

I think it does because it says that in this period (the last 3 months) RM has underperformed the FTSE 100 by 18%.
(It's not just RMs value affected by coronavirus)
The whole market has been massively affected by coronavirus yet RM is still underperforming in comparison to the rest of the market.

Imagine a country in lockdown. One in five posties off work. The company will be on its knees. If we weren't gonna break even before coronavirus, we sure as hell won't now. Really can't see a royal mail in five yrs time. At least not as we know it now. Sorry to sound negative but the Divi will be cut next yr or more likely suspended, then it's a short sellers fest to bellow a quid. Hope I'm wrong coz I've got skin in the game, but at quite a loss now so may as well hold and cross everything . Frustrating thing is, we ARE busy. Yet for whatever reason, ( clueless short sighted management) , we cannot make good profits.

Could the Royal Mail share price crash to under 100p?

12 Mar 2020, 19:28

Nearly there.

Could the Royal Mail share price crash to under 100p?

15 Mar 2020, 21:19

Some people like penny shares that is all I am saying!

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