Most people wouldnt buy shares in a company when the onething it was famous for was dying out.
Yet the public clamoured to buy Royal Mail Group (LSE: RMG) when it was floated in September 2013, even thoughthe writing is on the wall for its letters business, thanks to things like email.
Royal Mails Christmas trading update reported that addressed letter volumes fell 3% in the last nine months, although revenues held steady.
Management had expected an even bigger drop, of between 4% and 6%, and clearly so had investors, who were unruffled as the share price rose 3.5% in early trading.
Royal Mail pinned the better-than-expected letter volumes on the UK economic recovery. So there is still some life in letters.
Write Me A Letter
Today is a red letter day for Royal Mail, because its now clear that investors have accepted that letters will continue their decline, and are investing in the group for other reasons.
The big question is whether its parcels operation can thrive in the UK and beyond.
Royal Mail handled 120 million parcels in December, up 4% year-on-year(a good number of them mine, as, like millions of Britons, I did all my Christmas gift shopping on-line).
Worryingly, parcel revenue performance was flat, however, as the highly-competitive market hitspricing power. At least that markeda slight improvement on the 1% decline in the first half of the year.
The10% rise in Parcelforce Worldwide volumes was cheering,butagain, management were concerned aboutpricing pressures.
Royal Mail is still king of the parcels market, the UKs largest carrier with around 40% share. And although competition is tough, its sheer scale allows it to drive offsmaller carriers such as Coventry-based City Link, which announced its closure on Christmas Day.
Return To Sender
There were encouraging signs elsewhere, notably as 8% revenue growth in both volumes ANDrevenues in its General Logistics Systems (GLS) business. Current investors wont be in a rush to sell.
The Royal Mail share price is down nearly 30% in the last 12 months,but despite that discount I dont see this stockas a particularly tempting buy.
Now thatthe initial flotation euphoria has died down, investors are getting a more clear-headed view of the scale of the challenge it faces conqueringa toughparcels market.
Trading at 16.4 times earnings and yielding around 3%, Royal Mail doesnt deliver the goods for me.
That yield looks even less juicy when you see the FTSE 100 is packed with top stockspaying as much as 5% or 6% a year.
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