Will the Royal Mail share price recover in 2022?

The Royal Mail (LSE:RMG) share price has been volatile in recent times. Although investors have retreated from this stock, I’m now wondering if the worst has passed for this former FTSE 100 constituent and if it will recover this year. Let’s take a closer look.

Strike action

Shares in this key UK-based postal service have plummeted in the past year. During that time, the share price has fallen 51% and it’s down 21% in the last month. The shares are currently trading at 269p. 

The big news is that strike action will likely affect Royal Mail’s operations this month. Around 2,400 manager-level employees from 1,000 different offices will go on strike between 20 and 22 July. This has the potential to cause mass disruption to the firm’s operations.

The decision to go on strike was due to issues around pay increases. If the business addresses worker concerns, wage inflation may begin eating into future profits. This could be bad news for the shares. 

The latest news on strike action only adds more uncertainty to the company’s performance as it emerges from more profitable trading during the pandemic. I will be watching closely to gauge how the strike action impacts the day-to-day running of the firm, given that such a high number of managers are participating.

Parcel volumes and recent results

There are certain characteristics of this business, however, that indicate to me that things might not be as bad as they seem.

For instance, the company currently has a price-to-earnings (P/E) ratio of 5.4. While this number in isolation tells me very little, comparison with historical P/E ratios can reveal whether bad sentiment and news is already priced into the shares. The historical P/E ratio is around 11, indicating that the current share price already reflects a very bad scenario. 

Despite this, the firm has announced that it will be raising prices and embarking on a cost-cutting mission to save £350m.

Financial results have also deteriorated since the pandemic. For the year ended March 2022, revenue declined 5.6%. In addition, pre-tax profits also dipped by 8.8% against the prior year. 

Much of this can be explained by falling parcel volumes following a prolonged period of heightened demand throughout 2020 and the early part of 2021. In fact, testing kits made up around 7% of parcel volumes in 2021. With testing requirements having expired, this volume will likely be lost. As a potential investor, this trend of declining volumes is worrying.

Overall, Royal Mail may have a tough time ahead. Strike action and the recent trend of lower volumes could hit the balance sheet. Given all these issues, I think a recovery is still some way off. I won’t buy today, although I’ll keep my eye on the shares.