Royal Mail share price: what’s the outlook after analysts downgrade stock?

The British postal service continues to struggle after being booted from the FTSE 100 at the end of last year, with investment banks recently downgrading the company’s stock.

Royal Mail's share price fell nearly 3% late on Monday after coming under pressure from analysts downgrading its stock.

Analysts at US-based investment bank Jefferies lowered its valuation on Royal Mail, reducing its target price for the stock from 220p to 170p a share on Monday.

Jefferies blamed the postal service’s low productivity in the UK as a major hurdle to overcome and a contributing factor in its decision to downgrade the stock, with Royal Mail's output 50% below the sector average, damaging its profitability.

Royal Mail five-year turnaround plan to boost profitability

Royal Mail’s share price has lost more than 60% of its value over the last 12 months of trading, while the FTSE 250 index, which is a member, has seen a 10% decline over the same period.

In response, the postal service unveiled a new five-year turnaround plan in its full-year results, with the strategy looking to boost its profitability by reorienting the business around parcel delivery and diversifying its international business.

To finance the turnaround, Royal Mail has said that it must cut its total dividend for 2019 to 15p a share, down from 25p a share last year.

‘No easy’ fixes for Royal Mail, says Deutsche Bank

Jefferies wasn’t the only investment bank to be critical about Royal Mail’s performance, with Deutsche Bank analysts also downgrading the stock.

The German lender said that Royal Mail’s share are ‘overvalued’ in recent note to investors cutting its target price for the stock – even lower than Jefferies – to 150p a share down from 180p a share.

Deutsche Bank did say that the share price may climb higher over the course of its five-year strategic plan if it is able to drive a rebound in profits and cash flow.

However, the bank did add that ‘there are no easy short/medium-term fixes for the Royal Mail as the business model is largely a fixed cost business that is facing a material decline in letter volumes and has a unionised workforce’.

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