2022 has been a rough year so far for the Royal Mail (LSE:RMG) share price. Despite delivering a stellar performance throughout the pandemic, the stock’s momentum has begun to cool.
There are growing fears surrounding the firm’s recent slowdown in top-line growth. And when combined with higher operating expenses on the horizon, investors have been selling. So much so that shares now trade almost 40% lower than three months ago.
But are these fears justified? And if not, does that mean this company is now undervalued? Let’s explore.
Why is the Royal Mail share price crashing?
The recent downward trajectory of this stock is undoubtedly being driven by multiple factors. However, from what I can tell, it boils down to two main elements.
The first is a slowdown in growth. Looking at the latest results, both parcel volumes and, in turn, revenue fell year-on-year, albeit by single digits. Delivery performance remains firmly ahead of pre-pandemic levels. But seeing the Royal Mail share price stumble after reporting negative growth is hardly a surprise.
The second factor seems to be what’s causing the most concern. Once again, management is embroiled in arguments with worker’s unions – something the company has quite a reputation for. With inflation rising suddenly, the Communication Workers Union have requested additional pay increases to match the devaluation of money.
But with operating margins standing at only around 8%, the request for an approximate 5% increase in employee salaries could have dire consequences on profitability. On the other hand, if management refuses to boost wages, I wouldn’t be surprised to see strikes in the near future.
It seems the company is caught between a rock and a hard place. And with either outcome being bad news for investors, the Royal Mail share price has been understandably falling over the past few months. But is it now too cheap?
A FTSE 100 bargain?
Seeing growth slow is obviously frustrating, but it was hardly unexpected. The pandemic created a uniquely favourable operating environment for e-commerce businesses. And that meant more business for Royal Mail.
With physical retailers reopening their doors, a drop in demand for the group’s services was inevitable. Yet it’s worth noting that its international operations, GLS, still managed to achieve 4.5% top-line growth compared to a year ago.
The situation with the unions is concerning, with no easy solution in sight. But does that merit the collapse of the Royal Mail share price? I’m not so sure. Today, the group is trading at a price-to-earnings ratio of 3.7. And compared to the industry average of 24, that looks exceptionally low!
Time to buy?
All things considered, I believe investors have let their emotions get the better of them. And as a result, the Royal Mail share price is significantly undervalued. At least, that’s what I think.
Having said that, as a long-term investor, this opportunity doesn’t interest me. The concerns surrounding the situation with the union are not unwarranted. And with no clear path to resolution in sight, I feel there are far better long-term opportunities elsewhere for my portfolio.
