Stock of the day 21/01/2015 – Royal Mail PLC

After a Christmas period that, in theory, should have provided a boost for British institution Royal Mail, the company is ready to release its first trading statement of the New Year on Thursday. However, the postal service is coming off the back of a dismal 2014, a trend that looks set to continue into 2015.

Royal Mail started 2014 at £5.74, and quickly reached its yearly high of £6.16 in mid-January, only to match this high at the end of February. However things quickly went downhill from there and, despite a brief rebound in May, share prices had hit £3.88 by the end of September. After this low the company seemed to be regaining some ground in the run up to its half-year earnings release; yet a disappointing set of figures saw share prices plummet 9%, and by mid-December Royal Mail was back at £3.88. The company managed to open 2015 at £4.30, and has maintained this price since then, but considering investors reactions to the last announcement, holding onto this price may prove difficult.



The aforementioned half-year earnings that caused such a vehement reaction from investors saw a fall in pre-tax profits to £218 million from £233 million year-on-year, as CEO Moya Greene reiterated the looming issue of Amazon Logistics as a potential thorn in the company’s side. The pinch of this increasing presence of delivery services was felt by City Link, which collapsed over Christmas. In fact, City Link’s demise provided a boost for Royal Mail over Christmas, and the company actually rejected an offer to rescue City Link from closure.

It isn’t all doom and gloom for Royal Mail. The company is taking steps at increasing efficiency and performance; after announcing in October a £130 million investment in providing postal delivery workers with handheld devices to improve delivery services, this week saw the confirmation of a new desktop services contract signed with Computacenter for its 30,000 employees, again with the aim of improving its service.

More interestingly for the company is the potential for a £1 billion boost from the valuation of its surplus property, which was initially valued you £500 million. This is due to a property boom in London where the company has a selection of redundant sorting offices after a switch to the space-conservative merchandised sorting.

However, in the short term these factors are unlikely to help Royal Mail avoid disappointing investors tomorrow. Despite earnings per share expected to grow to £0.32 from £0.26, analysts are expecting the company to miss its target of £566 million operating profit. With this in mind, the company has received an average rating of ‘hold’ and an average price target of £4.98, slightly above its current price.