Right now I’m comparing some of the most popular companies in the market with their sector peers in an attempt to establish which one is the more attractive investment.
Today I’m looking at Royal Mail (LSE: RMG).
Valuation
As Royal Mail is fairly new to the market historic financial data for the company is not as forthcoming as I would like. In addition, as essentially a one-of-a-kind company, Royal Mail has few business peers.
However, Royal Mail sits in the industrial transportation sector of the market within which it has two potential peers, Stobart Group and UK Mail Group (LSE: UKM).
Arguably, Royal Mail’s closest equivalent as a business is the UK Mail Group.
So, let’s have a look at the valuations. Based on City estimates Royal Mail is trading at a forward P/E of 12.2. In comparison, UK Mail is trading at a forward P/E of 19.7 and Stobart Group is trading at a historic P/E of 15.4.
What’s more, the industrial transportation sector average is trading at a historic P/E of 19.7. All in all, this indicates that Royal Mail is cheap at current levels, despite recent gains.
Company’s performance
In addition, it would appear that Royal Mail’s current valuation is undervaluing the company’s growth, both historic and that predicted by the City.
In particular, during the past two years Royal Mail’s pre-tax profit has exploded 62%. Furthermore, based on current City estimates, the company’s pre-tax profit is expected to hit £683 million for 2015. That’s compounded growth of 242% over four years, which is impressive.
In comparison, UK Mail has been able to notch up pre-tax profit growth of 38% during the past two years and earnings per share are expected to expand around 30% for 2014.
This further supports my argument that maybe Royal Mail does deserve a higher valuation.
Dividends
At current prices Royal Mail supports a dividend yield of 2.4%. Additionally, City analysts currently predict that Royal Mail’s dividend payout will expand 60% during the next two years.
Unfortunately, this is lower than that of UK Mail, which currently supports a dividend yield of 3.1%. Although this yield is higher than that of Royal Mail, UK Mail’s dividend payout is only expected to grow around 20% during the next two years.
Foolish summary
All in all, it would appear that Royal Mail is relatively undervalued in comparison to its closest rivals. So, overall, I feel that Royal Mail is a much stronger share than its peers.
