Royal Mail share price: what’s the latest after strike action threatens profits?

Royal Mail warned investors last week that strike action over the Christmas period could see its UK unit report a loss next year, with it forced to delay its turnaround plans aimed at addressing falling revenues driven by declining letter volumes.

‘Industrial action, or the threat of it, can only hurt our company, and our colleagues,’ Royal Mail CEO Rico Back said. ‘That is because, in today’s postal market, our customers have choices.’

‘Consumers can send a text or email when they would once have written a letter; and shippers can choose from a wide range of delivery companies, not just Royal Mail.’

The warning, which was delivered in its half-year results, prompted its share price to fall 16% to 191p. However, the stock has recovered some of its losses, with the stock closing at 207p on Tuesday.

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Goldman Sachs upbeat about Royal Mail’s share price

Goldman Sachs is the only bank to maintain a ‘buy’ rating for the stock in November, issuing a target price of 300p for Royal Mail.

Based on Royal Mail closing at 191p on Tuesday, analysts at Goldman Sachs believe the stock has a potential upside of 57%

JP Morgan is less optimistic about the postal service’s price trajectory, with it reiterating its ‘underweight’ rating in November and issuing a 159p target price for the stock, representing a potential downside of -16%.

Liberum Capital and Deutsche Bank both reiterated a ‘sell’ rating for the stock, with Barclays Capital issuing an ‘overweight’ rating.

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Royal Mail under pressure from declining letter volumes

Despite Royal Mail recording its strongest UK letter revenue performance for five years in its first six months of trading, the postal service admits that its letter business remains under considerable pressure.

‘Lower than anticipated GDP and lower GDP forecasts for 2020-21, together with business uncertainty, are expected to have an impact on addressed letter volumes,’ Back added.

For 2019-20, Royal Mail expects addressed letter volume decline (excluding elections) to be in the 7% - 9% range, with volumes forecast to fall between 6% - 8% the following year.