Can Royal Mail still deliver?

Royal Mail shares shot up in value in their first full day of trading, rocketing from their sale price of 330p to 490p despite a rush of retail investors selling their holdings on the IPO day .

The price didn’t stop there either, rallying up to a high of 591p on 5 November before significant profit-taking set in. The company now looks set to join the FTSE 100 at the next reshuffle in December. This is the equivalent of a first-division football team joining the premier league, and is quite an achievement. Not only does it boost a company's profile but it means that investment funds tracking the index have to buy shares in it, which usually bolsters the share price.

Needless to say, the ramifications of such an extreme jump in profile will leave business secretary Vince Cable recoiling from accusations that the Royal Mail was sold too cheaply in the first place. His claims that the shares were higher due to frothiness and misplaced speculation have yet to be borne out.

Parcel potential

We all know that the letters business is a dying breed, but the parcels sector of the company is certainly one to watch. In light of the boom in online shopping, this is an area that should grow.

Looking at its key competitor, UK Mail, the parcels business represents 43% of the group’s overall revenues and saw a 21% increase in revenue growth to the end of September when compared to last year. Overall, UK Mail’s pre-tax profit increased 63% to £11.9 million, compared to £7.3million in 2012. Cost-cutting and automated sorting should go some way to help boost these numbers over the medium term.

It’s a competitive area, with the likes of Deutsche Post (DHL in the UK), FedEx and TNT all vying for business, so exploiting the potential growth in the parcels area and sustaining market share will be interesting. Some casualties are likely, and a few acquisitions and/or mergers are potentially in the offing.

The challenges faced by the management of Royal Mail are similar to its rivals’. The issue of labour relations is something of a priority, and probably the reason the stock was so poorly priced in the initial stages. Until this thorny issue is put to bed, we may see a degree of caution from potential investors. Currently IG client accounts are 55% short this stock.

Posting interim results

Tomorrow we will get to see interim numbers from the group, with details of the proposed business plan likely to decide the near-term direction for the stock price. Operating profits for the year to the end of March 2013 doubled to £440 million. The last set of interim results saw a figure of £144 million for the six months to September 2012 – a sharp increase from the £12 million reported the year before. Based on the competition and the slowdown in ecommerce, we may see some glancing weakness in tomorrow’s update.

Nevertheless, with the busy Christmas period upon us, one could expect that the delivery schedule will be positive for revenues.

While it’s difficult to assess a stock chart with so little price action, the head and shoulders pattern (a classic corrective pattern) has completed. The textbook view puts the 500p mark as a potential target unless we see the stock retake the 550p level.

Royal Mail plc chart

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