Remember the bitter political battle that followed last years controversial privatisation of Royal Mail Group (LSE: RMG)? The government priced its shares at 330p, only to see them soar 38% on the first day of tradingto445p.
Business Secretary Vince Cable dismissed the buying frenzy as froth and speculation, but it continued fizzing into January, when the shares peaked at 618p.
Undervaluing the 500-year old institution cost taxpayers an estimated 2.3bn. But did politicians really undervalue Royal Mail, or did excitable markets overvalue it?
Increasingly, it looks like the latter.
Right now, the shares trade at around 430p, after falling almost 10% in a morning after Royal Mail revealed a 21% drop in operating profits in the first half to 279m. That was down from 353m at the same stage last year.
The froth and speculation has now been thoroughly blown away.
Red Letter Day
There was some good news in todays results. Management has been improving performance and cutting costs, as you would expect in a former state-owned enterprise.
Its General Logistics Systems business continues to perform well, with revenues up 7%, while profit margins increased, letter volumes fell more slowly than expected (although they still fell), and letter revenues actually increased.
But RMG also faces some right royal challenges. The most unnerving comes from online retail behemoth Amazon, which now has its own delivery network, and launched its same-day delivery service in October.
Royal Mails parcels delivery service was expected to be the big growth area, given the rise of online shopping. So a 1% slide in profits to 1.46bn is a major concern.
Itsstatutory obligation to provide a universal postal one price goes anywhere service six days a week could make it harder for it to fight back, especially given Amazons deep pockets, and the advantages enjoyed by nippier rivals such as TNT and DBD.
Management is now putting its faith in the busy festive period, which will determine overall performance. But a good investment isnt just for Christmas, it should deliver all year round.
Perhaps the biggest losers from the Royal Mail privatisation werent taxpayers after all, but the Johnny-come-latelys who bought its shares at around 600p. They will be nursing losses of up to 30%.
Yet todays share price fall may tempt some long-term investors, who can now lock into a prospective dividend yield of around 4.4% a year.
Butremember, this stock is notoriously difficult to value. Just ask Vince Cable.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.