2022 has been a disaster for the Royal Mail (LSE: RMG) share price. After starting the year above 500p per share, it’s crumbled and is now trading around 290p.
Royal Mail shares have dived on concerns over the economic recovery and more internal issues at the FTSE 100 firm. Yet research suggests that City brokers are optimistic that Royal Mail’s share price will surge from current levels.
Share price tipped to surge!
A dozen analyst forecasts compiled by the Financial Times yields a median price target of 392.5p per share for the next 12 months. That’s up 35% from current levels.
The most pessimistic forecast suggests a 12-month target of 205p for Royal Mail’s share price. But one broker believes the courier will trade at 605p within a year. That’s up 108% from recent levels and would allow me to double my money if I invested today.
But, of course, there’s only one broker saying so and forecasts are never guaranteed.
Revenues slump
So what’s gone wrong for Royal Mail shares in 2022? Well, the business hasn’t been helped by e-commerce growth returning to more normal levels following the end of pandemic lockdowns. This has caused parcels traffic at the firm to decline from the highs seen during the height of Covid-19.
It has also suffered as the cost-of-living crisis has worsened. The courier’s operations are highly sensitive to broader economic conditions and inflation is hitting demand for its services.
Financials this week showed group revenues down 5.1% in the three months to June, with sales at its UK letter and parcel division collapsing 11.5%.
Royal Mail said that the latter decline was due to “weakening retail trends, lower [coronavirus] test kit volumes and a return to structural decline in letters”.
Cost problems
Unfortunately the company’s woes stretch beyond its slumping bottom line too. Its inflexible cost base failed to adjust to these lower volumes. And further disappointment from its long-running cost reduction programme emerged in the quarter too.
Royal Mail’s UK division thus slumped to an adjusted operating loss of £92m.
The problem of soaring inflation is also causing colossal staff-related issues for the firm. The company is at loggerheads with the Communication Workers Union over pay and this week almost 98% of members voted for industrial action.
The business will either have to hike its labour costs or endure staff walkouts later this year.
GLS remains robust
However, it’s not all bad. The outlook is much brighter for its General Logistics Systems (GLS) overseas parcel division which delivered a £94m operating profit in the first quarter.
In fact, the business has announced plans to rename itself International Distributions Services to reflect the growing importance of GLS to the group. The division has expanded rapidly across North America and Europe in recent times.
The verdict
Right now, Royal Mail shares offers terrific all-round value. It trades on a forward P/E ratio of 7.6 times and boasts a 7% dividend yield.
But the business faces a multitude of problems that have resulted in that cheap share price. And I think they could plague Royal Mail and its share price over the long term.
So I’d rather buy other UK shares to try and double my money during the market recovery.
