Today I am outlining why Royal Mail (LSE: RMG) could be considered a terrific stock for growth hunters.
European troubles going postal
Postal giant TNT Express grabbed the headlines this morning when it issued a shock profit warning, a situation that has driven shares more than 10% lower at the time of writing. The company said “overall trading conditions in Europe have deteriorated further and competitive pressures have increased” since its last update in July, and promised to subsequently step up cost-cutting and investment to
mitigate these issues.
The news has obviously come as concern to Royal Mail, whose GLS courier network straddles 37 countries across the length and breadth of the continent. In July’s financial statement the company advised both volumes and turnover at GLS advanced 6% during April-June, although the division remains at the mercy of the same macroeconomic headwinds facing TNT.
Still, investors should remember that its European operations only account for 17% of group revenues, with the bulk of the remainder comprising of parcels and letters delivery in its core British markets.
And although the growth of e-mail, mobile communications and other structural changes is driving letter volumes through the floor, I believe that the effect of an improving domestic economy on retail sales should drive parcels traffic skywards.
Indeed, latest British Retail Consortium data showed non-food internet sales surge 19.8% year-on-year during August, the fastest rate of growth since records began in 2012. I believe that the impact of galloping ‘m-commerce’ on revenues growth — combined with aggressive restructuring work across the business — should drive earnings higher in coming years.
A first class growth selection
City analysts expect Royal Mail to record stonking growth to the tune of 25% for the year concluding March 2015, to 33p per share. And forecasts point to a further 14% advance in 2016 to 37.6p.
These projections leave the business changing hands on a P/E multiple of just 12.9 times forward earnings, bashing corresponding readings of 17.3 and 19.8 for UK Mail Group and TNT Express respectively. And next year’s further earnings advance pushes Royal Mail’s figure still lower to 11.3 times.
And the courier’s terrific price relative to its growth prospects is underlined by price to earnings to growth (PEG) numbers of just 0.5 and 0.8 for 2015 and 2016 correspondingly. Any figure of 1 or below is generally considered exceptional bang for one’s buck.