Royal Mail PLC: Is the stock market underestimating its growth potential?

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Suggesting that Royal Mail PLC (LON:RMG) (RMG.L) could offer strong growth potential may seem like an unusual assertion to make. After all, the company has struggled to generate improving EPS due in part to declining letters volumes in its UK operation.



However, I think that the stock market could be underestimating the future prospects of the business. Its UK parcel business could benefit from a tailwind as the popularity of e-commerce grows. This could help it to grow and may mean that the letters part of its business becomes gradually less important over the coming years.

Royal Mail may also be able to offer an impressive international growth outlook. The company’s GLS division has been able to generate double-digit growth in recent quarters, and this trend could continue in future.

Alongside this, the company is financially capable of making further international acquisitions to my mind. This could strengthen its position, since it may gradually become less reliant on the UK for its income. At a time when political risk remains high due to the threat of nationalisation, this may create a growth opportunity for the company over the coming years.

With the Royal Mail share price having a dividend yield of around 5.5%, I think that it offers good value for money at the moment. It could perform well versus the wider FTSE 100 at a time when a number of the index’s constituents appear to lack a large margin of safety in my view.

Therefore, while the stock may not be seen as a particularly attractive growth share, its long-term investment potential appears to be bright in my opinion. This could lead to a rising stock price, as well as an improving dividend outlook.

With the stock having what appears to be a sound strategy in areas such as cost avoidance and in becoming more efficient, it could be a strong performer in the coming years in my opinion.