Royal Mail shares: time for bargain hunting ahead of half-year results?

When is Royal Mail’s earnings date?

Royal Mail reports first-half (H1) earnings on 21 November, covering the six months to 29 September.

Royal Mail earnings: what does the City expect?

Royal Mail is expected to report operating profit of £232 million, while headline earnings per share (EPS) are forecast to fall 46% to 7.3p, and revenue is expected to rise 2.8% to £5.07 billion. It has beaten estimates for EPS in four of the last eight reports, and has surpassed revenue forecast in six of the previous eight updates.

Royal Mail continues to operate in a highly competitive environment, and the decision by workers to go on strike will not help its business prospects. In addition, it has to find the cash to spend on upgrades to its UK operations, which are expected to cost £1.8 billion, while at the same time its net debt pile sits at over £300 million. The decline in earnings is part of a long-established trend, while the dividend has also been cut. So far there is little sign of either picking up. Indeed, with the yield currently sitting at 11% there is even the potential for another cut in payouts, and as such Royal Mail might not be the automatic destination for income investors looking for a solid dividend payer.

Admittedly, the shares are cheap, at just 9.3 times forward earnings, a level far below the five-year average of 11.7, and only just off the 2019 low of 7.6. This does give them plenty of room to move higher if the firm issues some strong earnings, but with so much competition and ongoing troubles with the workforce, the lowly valuation looks justified.

How to trade Royal Mail’s earnings

There are 14 analysts that cover Royal Mail’s shares, and at present three have ‘buy’ recommendations, while five rate the shares as a ‘hold’ and six rate them a ‘sell’. The current median target price is 205.7p, 10.5% below the present 230p price.

Volatility in Royal Mail shares has risen since August, when the 14-day average true range fell to just 5.5. The current reading is 8.1, suggesting an average move of 3.5%. The average move on results day is 4.6%, while FY results in May saw a gain of 3.3%.

Royal Mail shares: technical analysis

For the moment, it looks like Royal Mail has found a bottom at 178p, potentially halting the downtrend of 2018 and 2019. Since bottoming out in May and June, the price has recovered higher lows, but it has yet to break above the 232p high from September. A move above this would create a higher high and reinforce the bullish view. Conversely, a fresh pullback targets rising trendline support around 200p.

Royal Mail: one for the brave

Technical traders might like the look of the bottoming pattern in Royal Mail shares, while some fundamental investors will be tempted by the lowly valuation. Bad news could spoil the nascent positive outlook here, and certainly the outlook for earnings doesn’t provide much optimism. But if they do surprise to the upside, we could be witnessing the beginning of a recovery.