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Royal Mail trading statement: is the share price rally justified?

While Royal Mail shares have slowly rallied since May, the overall outlook is tough. Will the gains of the past few months fizzle out following this week’s results?

Royal Mail Source: Bloomberg

When is Royal Mail’s trading statement published?

Royal Mail publishes its latest update on 6 February, covering the first nine months of its financial calendar.

Royal Mail earnings: what does the City expect?

Things are tough for Royal Mail. It faces stiff competition in its UK parcel delivery market, while letter volumes continue to decline. Its debt pile is set to grow as well, further increasing the burden on the firm. While the shares are only trading at 12.2 times forward earnings, this is comparatively expensive – investors, had they been brave enough, could have snapped them up at 7.6 times earnings in the middle of 2019. Now, what little good news investors might have enjoyed has been factored into the share price.

December is always a crucial period for Royal Mail, so any improvement in performance could lead to some short-term upside for the shares, although it will likely be short-lived.

How to trade Royal Mail earnings

The average move on results day for Royal Mail shares is 4.4%, although the publication of first-half figures in November wiped more than 13% off the share price. Of 12 analysts covering the stock, only two have ‘buy’ recommendations, with four ‘holds’ and six ‘sells’.

Royal Mail shares: technical analysis

While the shares have fallen sharply since May 2018, when they sat north of 500p, the price has, perhaps remarkably, carved out an uptrend since May 2019. The price has seen repeated higher lows in August, October and November, with the drop since early December taking the price back to potential trendline support from the May 2019 low. A break below 190p would be a bearish development and bring 185p into view, followed up by 180p and 172p.

If the current pullback carves out a higher low, then a fresh move higher may begin, targeting the previous higher high above 250p, last seen in December.

Royal Mail price chart Source: ProRealTime
Royal Mail price chart Source: ProRealTime

Is Royal Mail’s share price telling us something?

Perhaps it is the case that the modest, but still steady, gains in Royal Mail’s shares since May point the way to an improving fundamental outlook. If this is the case then investors should find out soon. If not, the bounce of the past nine months might soon be a distant memory.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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