Over the past 12 months, the Royal Mail (LSE: RMG) share price has crashed an unbelievable 60%. This performance has earned the stock the unenviable title of being one of the worst performing mid-cap stocks trading in London today.
However, it’s not all bad news for investors. The company’s dividend has cushioned some of the blow. Including dividends paid out to investors over the past 12 months, the Royal Mail share price has produced a total return of -54%. The extra 6% of performance isn’t much consolation for shareholders, but at least it’s something.
After these declines, the Royal Mail share price has unsurprisingly started to attract value investors. The question I want to answer is, is the stock an unmissable buy after losing nearly two-thirds of its value over the past 12 months, or could there be further declines on the horizon?
Undervalued?
Looking at the stock right now, it appears as if the shares are undervalued. Analysts have pencilled in a 69% decline in earnings per share for 2019, followed by a drop of 7% for 2020, leaving the stock trading at a 2020 P/E of just 10, in line with the sector average.
On other metrics, the stock also looks cheap. For example, it’s trading at a price to tangible book ratio of just 0.80, implying the Royal Mail share price is trading at only 80% of its break up value.
Then there’s that 9.5% dividend yield to consider. This is one of the highest dividend yields in the FTSE 250 and looks extremely attractive from an income perspective. However, with earnings falling and management coming under pressure to invest more money in the business, I don’t think this dividend is sustainable. Therefore, I’m going to ignore it in this article.
So, from an earnings and balance sheet perspective, the shares look cheap. But unless the company can convince investors it’s back on track and has returned to growth, I think it could be a while before investors return.
Indeed, with the City projecting earnings will fall for the next two years, it doesn’t look as if there’s any light at the end of the tunnel for Royal Mail. That’s without mentioning the fact that the company has a history of disappointing investors. Since its IPO in 2013, operating profit has declined by nearly two-thirds, and net profit has more than halved.
Bleak outlook
Based on this track record, I’m not a buyer of the shares at current levels. While the stock might look cheap from a book value perspective, the company’s record of creating value for shareholders is spotty, and the business has only shrunk since 2013.
Unless the company can prove this trend has come to an end and earnings have started growing again, I really don’t see any upside for the shares from current levels. In fact, I think you could go so far as to say that the stock deserves to trade at a discount to the rest of the market until growth returns.
That’s why I don’t think the Royal Mail share prices an unmissable buy after its 60% crash. There are plenty of other companies out there with much brighter prospects.
