Recently, Royal Mail (LSE: RMG) has seen its shares slide. In the past couple of months, the Royal Mail share price has fallen almost 20%. That is a lot, although it’s helpful to remember that the shares are still up 168% over the past year.
Given the recent weakness, I have been considering whether now is a good time to add the mail and logistics group to my portfolio. Here’s my take on things.
Business drivers for the Royal Mail share price
With an entrenched position in the UK communications network, Royal Mail is a likely beneficiary of any increase in volumes or pricing.
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With its large stamp price increases, the group has been able to mitigate some of the long-term decline in mail volumes. But a key part of the Royal Mail investment case in recent years has been the surge in parcel delivery due to higher levels of online shopping. Last year, the company saw revenues increase 16.6% as the pandemic resulted in a digital shopping boom. That translated into profits too. Basic earnings per share almost quadrupled, from 16.1p the prior year to 62.0p. That is a massive jump.
Reopened high streets may lead to a drop in parcel volumes. Indeed, total parcel volumes declined in the first quarter compared to last year, although revenue increased. In years to come, however, I expect online shopping to remain popular. That should help support the Royal Mail business.
Business challenges ahead
The company has had a very bumpy few years. Despite its strong performance over the past year, for example, the Royal Mail share price is still over 20% lower than it was in May 2018.
I continue to have doubts about the quality and consistency of the company’s strategy and management. Coping with fast-shifting demand patterns can be a challenging and costly exercise. While parcel demand last year was strong, that doesn’t necessarily indicate a long-term structural shift in Royal Mail’s fortunes, in my view.
Royal Mail share price risks
A share which goes up 168% in a year can also have a long way to fall. Could the recent drop in the Royal Mail share price be a sign of things to come?
A key risk for the company, which it identified in its annual results, is the current difficulty in forecasting not only volumes but also costs. For example, large numbers of postal workers needing to self-isolate could drive temporary staffing costs up, eating into profits.
My next move on the Royal Mail share price
Even after the recent fall, I don’t see today’s Royal Mail share price as offering a buying opportunity for my portfolio. It’s hard to know what the future parcel delivery demand will be.
Additionally, it is a competitive market. Last year’s operating margin was only 5.6% and the prior year it had been just 3.0%. Such a thin margin means unexpected costs can be disproportionately impactful. I see more attractive opportunities elsewhere in the market, so do not plan to add Royal Mail to my portfolio.
