Is £1.80 the turning point for the Royal Mail share price?

Royal Mail shares have taken a beating this year, and are now down 60%. With a P/E ratio of only 3, could £1.80 be the stock’s turning point?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Down 65% since its pandemic highs, the Royal Mail (LSE: RMG) share price hit a bottom of £1.78 last week. Since then, it’s recovered by more than 5%. So, could this be a turning point for the stock, and would I buy its shares for my portfolio?

Striking a sour note

The problems at Royal Mail can be attributed to a number of factors. The first is that the logistics giant no longer enjoys the tailwinds of the pandemic as parcel numbers decline. This has been further exacerbated by the cost-of-living crisis, limiting consumer discretionary spending.

Unfortunately, the FTSE 250 firm’s woes don’t end there. Royal Mail has also been dealing with strikes about pay and job security. These strikes have caused the company to lose around £1m a day. With future industrial action on crucial dates such as Black Friday and the weeks building up to Christmas, I’m expecting its bottom line to decline further.

Should you invest £1,000 in Royal Mail Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Royal Mail Group made the list?

See the 6 stocks

Care package required

Will Royal Mail go bust then? Well, the company’s balance sheet isn’t in tatters. That being said, it isn’t overly robust either. While it does boast a healthy debt-to-equity ratio of 16.3%, its short-term assets barely cover its short-term liabilities, at a ratio of 0.9. With its declining cash flow, its financials could be in a precarious position when it reports its half-year results next month.

Royal Mail: Earnings History
Source: Royal Mail Investor Relations

Royal Mail has also found itself in a tough spot when it comes to its modernisation and cost-saving efforts. This is because of union opposition to such measures, which include outsourcing work and potentially laying off workers due to more automation.

As such, the group will have to rely on its international arm, GLS to prop up its earnings. After all, GLS’s performance thus far has been rather impressive. It has managed to grow its top and bottom lines substantially over the last few quarters and has even brought in positive cash flow for its division. Nevertheless, with inflation running rampant and a technical recession (two consecutive quarters of negative GDP growth) currently in the US, help from the GLS arm may be limited.

No Royal Mail dividend

Despite Royal Mail’s dividend yield now being 10%, I’m doubtful that such a high dividend will be paid out, especially when the company is expected to see a substantial decline in earnings in the near term. It doesn’t help either that Deutsche Bank recently reduced the stock’s price target to £1.44. The German bank cited a “rapidly weakening macroeconomic backdrop for the UK that will impact consumer demand, lower productivity due to the stand-off with the unions over pay and both direct and indirect consequences of strike action”.

Having said that, the case that the Royal Mail share price has bottomed was made by UBS. It believes all of the headwinds are already priced in. Even so, the bank downgraded its price target to £2.05 from £2.80.

Keeping all that in mind, I’m not bullish on Royal Mail’s prospects. The potential downside risks remain elevated given the macroeconomic environment and lack of a plan to resolve current disputes. For that reason, I won’t be buying Royal Mail shares for my portfolio any time soon.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s what £20,000 invested in IAG shares at the start of 2024 would be worth today

IAG shares smashed the FTSE 100 in 2024, and Harvey Jones is kicking himself for squandering this buying opportunity. But…

Read more »

Investing Articles

BP shares are forecast to return 30% in 2025 – and they’re filthy cheap with a P/E of 5.8!

Harvey Jones bought BP shares twice in the autumn and after a bumpy start he expects great things in the…

Read more »

Investing Articles

At a P/E ratio of 8, are shares in this FTSE 100 winner unbelievable value?

3i is a top-performing UK stock that trades at a P/E multiple of 8. Should value investors be snapping up…

Read more »

Investing Articles

Best British growth stocks to consider buying in 2025

We asked our freelance writers to reveal the top growth stocks they’d buy in 2025, which included two 'Fire' recommendations!

Read more »

Passive income text with pin graph chart on business table
Investing Articles

2 shares to consider for turning an empty ISA into a £31,301 a year passive income machine

Earning passive income doesn’t take huge amounts of cash to start with. Investing in great companies consistently over time can…

Read more »

Investing Articles

What £20,000 invested in BT shares at the start of 2024 is worth now…

BT shares enjoyed a solid 2024, Harvey Jones discovers, especially once the bumper dividend is taken into account. So should…

Read more »

Investing Articles

The Lloyds share price could hit 80p in 2025!

The Lloyds share price could push as high as 80p in 2025, according to one highly respected analyst. Dr James…

Read more »

many happy international football fans watching tv
Investing Articles

This FTSE 250 stock offers no passive income but looks 42% undervalued to me!

Our writer has found one stock that he thinks could take off in 2025, even though it doesn’t offer the…

Read more »