The Royal Mail (LSE: RMG) share price has failed to excite this year. Down over 45%, this builds on what has been a rough period for the business, with the last five years seeing the stock pegged back by over 30%.
This disappointing performance continued yesterday morning as its price fell 5% after the release of the group’s trading update. The stock recovered to close the day, finishing at around 286p.
But will this recovery continue? And is now the time to be buying some shares?
Royal Mail results
The company released its Q1 update yesterday. And its dire outlook provides little optimism for shareholders.
Royal Mail revenues fell by 11.5% year-on-year to under £1.9bn, while the group’s revenues fell by 5.1%, as factors such as falling deliveries of Covid-19 test kits saw the firm take a hit.
It also said its adjusted operating loss stood at £92m, pinning this to a “disappointing performance on delivery of further efficiencies.” While the “inflexibility in the cost base to adjust to lower volumes” also saw this impacted.
There were a few positives, however, with the most notable spawning from its international business, GLS. The subsidiary posted an operating profit of £94m. It also remains on target for high single-digit revenue growth.
Further woes
The underwhelming set of results is not the only issue the business currently faces, as it goes toe-to-toe with the Communication Workers Union (CWU) regarding employee pay rises to keep up with the cost-of-living crisis.
The two parties have failed to come to an agreement after negotiations. And yesterday it was announced that 115,000 Royal Mail workers voted in favour of walkouts. With a 77% turnout, 97.6% of members backed strikes.
No dates have been set for the strikes, as it’s hoped one last push for a “straight, no strings” pay rise may see an agreement reached. But should the strikes occur, this could drag the Royal Mail share price down.
Not all bad
Despite these headwinds, there’s reason to see value in the current Royal Mail share price.
Firstly, the stock currently trades on a price-to-earnings ratio of 4.67. This falls well within the ‘value’ benchmark of 10. And to me signifies that Royal Mail may be undervalued.
On top of this, it currently offers a chunky dividend yield of 5.8%. With inflation reaching 9.4% in the UK for June, this offers me some protection against rising rates. With stagnant cash losing value, this could be a smart move.
However, the business does sit on a large pile of debt. With interest rates seemingly set to continue to rise, this could hold the firm back going forward.
Will it recover?
I think the Royal Mail share price may fail to recover in the times ahead. The firm faces mounting pressure from the CWU. And with inflation continuing to bite, a weak economic outlook may see it suffer this year. While its low valuation and substantial dividend yield are tempting, I won’t be buying Royal Mail shares right now.