Stock of the day 17/07/2015 – Royal Mail PLC

Hey wait a minute Mr Postman! Let’s take a look, look and see, what results you have in your bag for me!

In case you were left baffled by that fantastic reference to The Marvelettes’ song, Royal Mail reveals its latest trading statement next Tuesday in the midst of one year market highs and the impending pain of an Ofcom investigation. After its dismal end to 2014, Royal Mail failed to muster much momentum for the first few months of the New Year. It was gradually lifted away from its December nadir as 2014 wound down, and after starting 2015 at £4.30 had hit £4.45 following a positive trading statement at the end of January.

However, more than a few tumbles across February, through a mixture of broker warnings and raised stamp prices, left Royal Mail stuck in a trading bracket of £4.20 and £4.30 until the middle of March. A 4% jump on March 18th then lifted the company to a marginally improved trading band of £4.40 to £4.50 throughout the rest of that month and across most of April.


(Source: IT-Finance.com 17/07/2015)

Yet since the end of April, Royal Mail has really stepped up a gear. A 5.2% increase on April 30th to £4.68 was spurred on by the news that PostNL had ended talks with private equity firm LDC about expanding its Whistl postal service beyond its small-scale operation, leaving the entirety of Whistl’s UK operation in doubt. The suspension of Whistl’s direct delivery service was music to investors’ ears, and helped, alongside the Tory election victory, Royal Mail climb to a one year high of £5.32 by May 28th. The company was also helped along by a non-disastrous (something of a recent rarity for Royal Mail) set of full year results, which saw a 6% increase in adjusted operating profits before transformation costs to £7.40 million alongside flat revenue of £9.4 billion.

The start of June brought with it a 5% fall as George Osborne announced the government was to sell-off its remaining 30% stake in the company, but stock soon regained its momentum across June and July to open Friday are marginally below its 2015 peak at £5.29. However, further comments from Ofcom, which announced in June it intended to review Royal Mail, caused a sharp drop at the end of the week, leaving the stock at a current trading price of £5.13 (IT-Finance.com, 17/07/2015).

This ‘fundamental review’ of the postal sector will include an investigation into Royal Mail’s efficiency, as well as its (perhaps too dominant) role since the collapse of Whistl, the related changes to competition in the delivery landscape since its rival’s demise, and how Royal Mail’s pricing decisions may have contributed its Whistl’s UK withdrawal.

Of course, Royal Mail said it will ‘participate fully’ in the review, but this doesn’t mean investors should be too happy about what could be a disruptive process in the coming months. Investors will be hoping for some clarity on this issue, as well as any signs of a continued turnaround following the fairly promising full year results and news on how the company is negotiating the constant threat of Amazon. Royal Mail has a consensus rating of ‘hold’ with an average target price of £5.05.

Friday’s stock news:

Like Netflix on Thursday, Google had a nice surprise for its investors when it announced its second quarter results. The already pricey stock surged by 15% in the last 24 hours to an all-time high (when factoring in its 2014 stock split) of $681.96 as sales rose 13% to $14.35 billion, higher than the $14.3 billion expected by analysts, alongside a $0.5 billion increase in net income to $3.9 billion. Perhaps even more important than those obviously impressive numbers was the pledge by new CFO Ruth Porat that she would keep expenses, a growing concern for investors, from spiralling out of control without it impacting the company’s growth initiatives.