Is the Royal Mail share price now a glaring buy?

Key points

• Domestic parcel revenue was down 4.9% for the FY22 Q3, on a year-on-year basis
• The trailing P/E ratio is lower than two competitors
• In January 2022, the Omicron variant resulted in 15,000 absences

The Royal Mail Group (LSE: RMG) owns a number of instantly recognisable brands, including Royal Mail and Parcelforce Worldwide. As a postal and courier service, it operates throughout the UK. Postal volumes increased during the Covid-19 pandemic and, unsurprisingly, so did the company’s revenue. I’m therefore interested to find out where the Royal Mail share price is headed. Also, should I add this to my long-term portfolio? Let’s take a closer look. 

Recent results and the Royal Mail share price

The trading update for the three months to 31 December 2021 sheds some light on the company’s financial position. While revenue increased 17% compared to the same period in 2019, a year-on-year observation shows a decline of 2.4%. 

The same trend can be identified in the domestic parcel revenue and volume. Indeed, domestic parcel revenue increased 43.9% compared to the same three months in 2019, while the figure was down 4.9% on a year-on-year basis. Domestic parcel volume was up 33% and down 7% by the same time comparisons.

This suggests that the Royal Mail share price benefited from the increased requirement for courier services during the pandemic. As the world reopens, however, I’m sceptical about the company’s ability to maintain such high revenue and volume figures.

Also, the business is pursuing a cost cutting operation. It plans to reduce manager-level jobs by 700, at an initial cost of £70m. The company believes this will save around £40m per year.

A cheap growth stock?

Although recent results may indicate a decline, the firm’s trailing price-to-earnings (P/E) ratio is rather competitive at 4.93. This is lower than two competitors, PostNL and FedEx, that have trailing P/E ratios of 5.67 and 12.24, respectively. This may suggest that the Royal Mail share price is undervalued. Indeed, Barclays has a price target of 640p for the company. At the time of writing, it is trading at 397p.

Earnings-per-share (EPS) data is also strong. Between the 2017 and 2021 fiscal years, EPS increased from 44.1p to 52.1p. By my calculation, this results in a compounding annual EPS growth rate of 3.39%. This is both solid and consistent.  

Despite these strong historical results, the pandemic may still bring trouble for the company. In January 2022, the firm had about 15,000 staff absences from the Omicron variant. This equates to around 10% of the workforce. Any future variants could bring similar problems.

Although the Royal Mail share price may be cheap, I will not be buying this firm. The recent numbers on parcel revenue and volume look to be falling and I am concerned about this impact on the company. The future threat of variants could also have implications for the way the business delivers parcels and post.