With the Royal Mail (LSE: RMG) share price having declined by 50% in the last year, the stock may appear to be a high-risk investment. After all, it continues to face a downward trend, with investors being pessimistic about its near-term financial prospects.
This, though, could present a value investing opportunity. The company may face a tough outlook as a result of changing demands among consumers and a strategy which has failed to record the performance that was anticipated. However, with it offering a low valuation and improving financial prospects, it could be worth buying alongside another FTSE 100 recovery share which released results on Thursday.
Improving outlook
The stock in question is British Airways owner IAG (LSE: IAG). Its full-year results showed a rise in total revenue of 6.7% to €24.4bn, with operating profit before exceptional items increasing by 9.5% to €3.2bn. This was an encouraging performance in a year where the company had experienced a challenging period. Fuel prices increased by 30%, while Air Traffic Control disruptions created a greater degree of uncertainty across the industry.
Looking ahead, the company is forecast to post a rise in earnings of 6% in the current year. Due in part to its falling share price over the last year, the stock is on a price-to-earnings growth (PEG) ratio of just 1. This suggests that it may offer a margin of safety.
Of course, higher fuel costs and further disruption could be ahead for IAG. The wider airline industry is facing a challenging period that may weigh on its financial performance. However, with it having a low valuation it may be able to generate impressive share price performance over the long run.
Low valuation
As mentioned, Royal Mail’s share price has fallen heavily in the last year. Its plans to cut costs do not appear to have produced the results that had been expected. This is alongside a continued shift in customer demand, with letters becoming less popular in the UK. This is set to cause a decline in the company’s bottom line of 15% in the 2019 financial year.
Although turning around its performance is likely to take time, the price of the company’s shares suggests that there could be a long-term value investing opportunity on offer. The stock now has a price-to-earnings (P/E) ratio of around 7. This indicates that the stock market has factored in the risks it faces, as well as its disappointing financial outlook. It may, therefore, have a wide margin of safety on offer which provides an appealing risk/reward ratio.
Royal Mail’s financial future is clearly highly uncertain at the present time. However, with a refreshed strategy that is set to be put in place, alongside the growth potential offered by its parcels division, it could be worth significantly more than its current valuation suggests.
