Will Royal Mail shares deliver on new expectations from analysts?

The Royal Mail share price experienced a dip after hitting a 52-week high on 4 December. However, despite the drop and increased operating costs, analysts remain optimistic about the company’s long-term fortunes.

Royal Mail shares (LON: RMG) have surged by 177% in 2020. Ongoing efforts to improve its parcel delivery service have, somewhat fortuitously, run in sync with a global pandemic. With the UK locked down for large parts of the year, Royal Mail has, in some senses, become a frontline service. With deliveries continuing unabated, Royal Mail’s recent earnings report revealed that parcels now account for 60% of its income.

With £147 million invested in restructuring the company, investors have been bullish. Of 13 Wall Street analysts surveyed, four issued hold ratings in recent months, while five gave Royal Mail a buy rating. These forecasts proceeded a November rally for Royal Mail shares. From 261p at the start of November, shares ended the month at 307p. That broke the average 12-month price target of 215p suggested by Wall Street analysts.

Investment banks bullish on Royal Mail share price

November’s uptick has prompted Liberum Capital to upgrade its Royal Mail share price target to 320p. At the starting of trading on 8 December, the price was already at 327p after a strong finish to the week ending 6 December. By that measure, Liberum Capital analysts have issued a hold rating. JP Morgan also revised its forecast at the start of December and issued a top-end price target of 402p. The investment bank now classes Royal Mail shares as 'overweight'.

However, despite the bullish sentiment offered by investors, some critics believe Royal Mail will fail to deliver in the long-term. The recent first half (H1) earnings1 report showed an operating loss of £17.6 million. Pre-tax profit was down 87.7% to £18 million, while total letter volume was down 33%. On the positive side, parcel deliveries were up 31% in H1. However, with restricting costs taking their toll, IG’s chief market analyst Chris Beauchamp is cautious and speculated as to whether 'all the good news is in the price'.

Stamp price hike could leave negative mark

One point of contention, particularly from some media outlets, is the recent price hike. Royal Mail announced on 2 December that the price of a first-class stamp will increase by 9p to 85p on 1 January. That news, combined with falling delivery volumes, prompted Robert Lea of The Times to postulate that the 'writing is on the wall' for Royal Mail.2 Although the price increase is an attempt to cover costs and compete with Amazon et al, it’s a step too far for Lea and something consumers won’t swallow.

The Royal Mail share price rise has been something of a surprise this year. After crashing to 124p in March, shares have rallied and look likely to finish 2020 above 300p. Investment banks see promise in restructuring initiatives but there are doubts over recent price increases. Stamps and letters are a fading part of the business. However, they’re still significant and their current status is a negative for some commentators. Royal Mail shares are delivering right now, but opinions are split on how much longer they can maintain their bull run.

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1 https://www.royalmailgroup.com/media/11354/royal-mail-group-half-year-results-19-november-2020.pdf
2 https://www.thetimes.co.uk/article/writing-is-on-the-wall-for-royal-mail-as-it-raises-prices-again-bfjlk9g7j

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