WhenRoyal Mail(LSE: RMG) went public at the end of last year, a key selling point of the company was the groups exposure to the UK parcel delivery market. As more and more consumers do their shopping online, Royal Mail boasted that it was set to benefit from the rising number of parcels being sent around the UK.
However, nearly twelve months on from Royal Mails IPO, the company is struggling as growth in the key parcel delivery business has failed to materialise.
At the end of July, Royal Mail released a worse than expected interim management statement for the first three months of the companys financial year.
The company reported low single-digit revenue growth across the group, thanks to aweaker-than-expected performance within the groups UK parcel division. Further, the company warned that given the rising competition within the parcel sector,parcels revenue for the full year is likely to be lower than anticipated. Still, management stopped short of issuing a full profits warning. All in all, for the three months ended 29th June, Royal Mails group revenue increased by 2%.
With revenues growing at an anaemic rate, Royal Mail is slashing costs to boost profitability. Cost savings of 25m will be realised during the second half of the year.
Nevertheless, Royal Mail can only cut costs so much and with competition increasing within the sector, the groups revenues are only going to come under further pressure over time.
As Royal Mail struggles,UK Mail(LSE: UKM) has reported a solid start to the current financial year.Reported group revenues for the first quarter increased by some 2.5%, compared to the same period last year. Adjusted revenues increased by 4.5%.
This growth was driven by, you guessed it, an increasing number of parcel deliveries. UK Mail parcel volumes jumped by 10% year on year during the first quarter.
Whats more, as Royal Mail relies on cost cutting to boost profits, UK Mail is expanding capacity to reduce costs, streamline operations and steal market share.
Unfortunately, as UK Mail is growing rapidly investors are willing to pay a premium valuation for the companys shares. At present the company trades at a forward P/E of 17.1 and supports a dividend yield of 3.6%. City analysts are expecting the company to offer a yield of 3.9% next year.
In comparison, Royal Mail trades at a forward P/E of 13.2 and city analysts are expecting the company to offer a yield of 4.8% next year. Nevertheless, over the long term Royal Mails outlook is less certain and UK Mails long-term prospects are certainly more attractive.
But UK Mails growth comes at a price, which could out some investors off. The trouble is that most growth shares with bright prospects tend to trade at similarly high valuation multiples.
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Rupert Hargreaves 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.