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Can Royal Mail keep rallying ahead of first half earnings?

Having seen a huge rally in its shares since March, can Royal Mail’s first half earnings provide a first class update for investors?

When is Royal Mail’s earnings date?

Royal Mail reports first half (H1) earnings for the six months to 27 September on 19 November, with the RNS being released at 7am.

Royal Mail earnings: what does the City expect?

Royal Mail is expected to report revenue of £5.5 billion, up 8.3% from a year ago, while the group is expected to suffer a pre-tax loss of £23 million. However, underlying earnings are forecast to come in around £146 million.

Investors will be watching for commentary on the decline in letter volumes, an ongoing theme, and for clues on how well parcel deliveries will hold up heading into the next couple of years. While the group’s staff will have won plaudits for their continued service during the UK’s various lockdowns this will have only marginal impact on the bottom line.

The group faces a need to increase spending on automation in order to play catch-up with rivals, and with the more profitable letters delivery service still suffering a return to actual profits (as opposed to underlying or adjusted figures) seems unlikely. The group has made noises about changing its ‘universal service obligation’ but the government will fight any moves on this front. In addition, there is always the risk of more trouble with the unions, and while a truce here is holding any moves towards job cuts could provoke more disruption.

How to trade Royal Mail’s earnings

Of 13 analysts covering Royal Mail, five have ‘buy’ recommendations, with four ‘holds’ and four ‘sells’. The current median target price is 205p, a significant discount to the current price of 274p.

Royal Mail has beaten estimates in four of its last eight reports, while its shares fell 12.8% on the day of its full-year results.

Royal Mail shares: technical analysis

The past week has seen Royal Mail shares hit a two-year high, continuing their incredible rebound from the March lows, and trouncing the FTSE 100 with a 57% return over the past six months versus the index’s 7.1% return.

Crucially, the price has surpassed the high seen last December, creating a new higher high on this basis, and building on the higher highs and higher lows we have seen since March. Weakness into late October found support at the 50-day simple moving average (SMA), currently 243p, allowing the shares to bounce to their current level. Any weakness following its results may find support at the 50-day SMA, but any low that holds above 226p would be a higher low and thus maintain the bullish outlook.

A move back below 225p would spell some more near-term weakness, and it is certainly the case that, with the shares at such a high level ahead of these results, we may see some extended weakness.

Royal Mail faces tough challenges

Royal Mail shares have certainly done very well in the past half year, but the question is now whether all the good news is in the price. It looks to be another hard winter ahead, even with the vaccine news providing a road out of the current situation in the longer term. At 17 times earnings the stock is not overly expensive, but with the bargain hunting now mostly done the group needs to spell out a compelling roadmap to profitability to maintain forward momentum in the share price.

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