The Royal Mail (LSE: RMG) share price has been on a downer since the summer. It reached a peak of 613.8p, before dropping back to 415p at the time of writing. Royal Mail shares are still up around 75% in the past 12 months. But why has confidence faded, and why do I see it recovering in the next couple of months?
Firstly I want to look at the current bearishness in the wider context. Prior to the arrival of Covid-19, Royal Mail had been facing problems and was on a bit of a slide. Industrial relations, increasing competition, and the need to improve its technology, all helped send the shares down.
But the company has been addressing all of its issues well, and it really is starting to show. We’ve seen weakness in the latter part of 2021. But looking back over the past two years, the Royal Mail share price has almost doubled.
Some of the recent fall will surely be down to the fading of the pandemic effect. Lockdown did a lot to help the delivery companies, and it boosted Royal Mail’s 2020 performance. We don’t yet know what parcel volumes will look like once we’re finally away from the pandemic.
Parcel volume trends
We might need to see a few quarters before we get a good feel for longer-term sustainable profit levels. But in its September trading update, the company did give us a hint. Chair Keith Williams said: “In Royal Mail, we are increasingly confident that domestic parcels are re-basing at a significantly higher level than pre-COVID and believe we are maintaining our share of the market.”
He added: “Whilst we continue to expect further normalisation of parcel performance as we unwind from the pandemic and anticipate some upward pressure on costs, both adjusted operating profit and margin are expected to be higher in H2 compared to H1.”
My feeling is that we have seen a change in shopping habits that is unlikely to be reversed. Lockdown drove so many people to trying online shopping for the first time, and that led to Tesco needing to double its deliveries capacity. But looking just at the groceries home delivery market can easily hide a wider change.
So many people have discovered the real convenience of online shopping during the pandemic. And they like it.
Royal Mail share price boost?
So what do I think might shift the Royal Mail share price between now and the end of the year? Interim results are due on 18 November. And if they confirm the trend towards a higher underlying level of parcel volumes, I think that could draw investors back again.
And then there’s the promise of a festive season boost. If the company can give us any hints of its expectations, I think that might provide an uplift too. The big risk is in how much of the parcels delivery market is shifting towards the competition. It might be that Amazon is the big winner, not Royal Mail.
I don’t expect the Royal Mail share price to regain its 2021 high again this year. But my guess is that it could be heading in the right direction by Christmas.