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Will the Royal Mail share price keep dropping like a stone?

Andy Ross
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Over a month or three months, a year, three years, or five years, whichever timeframe you look at, you see the Royal Mail (LSE: RMG) share price falling like a stone. Results out this month will have done little to convince most investors that the postal operator is anything other than a terrible investment. There are a number of reasons for investors to be concerned. 

Highly unionised workforce

One of the big challenges Royal Mail is always likely to struggle with is the prospect of its workforce – in the UK at least – going on strike. Even now, trade unions are planning strikes. The workforce is highly organised and unionised, unlike in many UK companies today, and management seems unable to find a way to keep its workers happy. I think it must be a massive reason why the shares aren’t recovering – but it’s far from the only one.

Barely a boost from e-commerce

It’s a positive that Royal Mail is looking to use more automation. Many successful companies do it to cut costs. But the firm is saddled with a long history and isn’t as nimble on this front as some newer rivals. 

Change is needed though. Revenue at its UK Parcels, International & Letters business (UKPIL) for the nine months to end-December rose 1% on the prior year, growth that’s anaemic, especially given booming e-commerce that should mean a parcels bonanza for the firm.

Chief executive, Rico Back has called the outlook for 2020/21 “is challenging” and with no recovery in letter volumes and the lingering business uncertainty, the board has downgraded its expected volume decline for the coming year to 7%-9% from 6%-8% and “increased the likelihood” that UKPIL will be loss-making.

Big debt

Another problem for the share price is the firm’s ballooning debt – which is especially a concern given the lack of growth or productivity at the group. Its borrowing has increased as management has tried to get the business into better shape. Net debt was £1.4bn at the end of the company’s last reported period, whereas back in 2016 net debt stood at just £244m. This increase must be a massive concern as it can become a company’s undoing – the collapse of Carillion is an example of this.

One positive 

Investors can cling to the hope that the international business will save Royal Mail and eventually lift the plummeting share price but I’m doubtful. GLS is the overseas parcels operation and arguably the best part of the business. Its most recent figures showed it grew revenue 11.1% – and no doubt it’s where management should put most cash and investment. But I believe it won’t be enough to offset declining UK letter sending and small parcels growth. 

The shares may appear cheap with a P/E under six, but I think it’s a value trap. There’s still plenty of potential for the shares to fall further – and that’s exactly what I expect them to do.

The post Will the Royal Mail share price keep dropping like a stone? appeared first on The Motley Fool UK.

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Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020