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The Royal Mail share price has crashed by 30%! Buy the dip?

The Royal Mail share price has dropped by 30% in 2022, but is this a buying opportunity, or a sign to stay away? Zaven Boyrazian...
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The Royal Mail (LSE:RMG) share price hasn’t had the greatest run this year. In fact, since 2022 began, the stock has fallen by just over 30%. Considering this business was seemingly running full speed ahead only a few months ago, this downward momentum has been quite surprising to some investors.

So is this just market volatility? Or is there something more problematic happening under the surface?

Mixed results with mixed reactions

The company released a trading update at the end of January that contained some mixed news. Parcel volumes have seen a 7% decline versus a year ago for the quarter. But it’s worth remembering the figures are compared to an exceptional period when the pandemic fuelled an impressive boost to e-commerce activity. What’s more, despite the slip in parcels processed, it’s still 33% higher than pre-pandemic levels.

With volumes taking a tumble, parcel revenue also suffered, albeit by 4.9%. Yet, once again, it remains significantly ahead of pre-pandemic levels – by 43.9%, to be precise.

These are certainly not amazing results. But they aren’t terrible either. And if this were the sole cause of the recent drop in the Royal Mail share price, I would be tempted to say a buying opportunity has emerged for my portfolio. Unfortunately, there’s a larger situation at work which seems to be responsible.

The tumbling Royal Mail share price

Around 12% of the company’s workforce were off sick in January. That’s about 15,000 workers unable to do their jobs, most likely due to Covid-19 remaining a disruptive force. As a consequence of having to pay overtime and cover the costs of sick leave along with temporary staffing, the group has seen expenses rise by more than £340m.

To add salt to the wound, the already shaky relationship between Royal Mail and the Communication Workers Union (CWU) might be about to get even more strained. After finally settling a long-standing argument about worker pay, it seems the CWU is back with more demands now that inflation is climbing. Needless to say, rising labour costs will undoubtedly have a significant impact on margins. And that’s obviously bad news for the Royal Mail share price.

The leadership has begun undergoing some operational shuffling to save up to £220m annually. So far, 700 managers have been shown the door, slashing £40m in annualised expense. However, the move also resulted in a £70m reorganisation charge. So these benefits won’t likely be seen until 2023 onwards.

Time to buy?

The situation currently seems quite bleak for Royal Mail and its share price. But it’s worth remembering that many of the challenges being thrown at management are ultimately short-term problems. Its GLS division is still delivering near-double-digit growth with guidance indicating that this won’t change in the near future.

Ignoring the one-time £70m reorganisation bill, full-year guidance remains unchanged. In other words, the firm currently believes it remains on track despite the recent hiccups.

Personally, I’m not entirely convinced. The situation with CWU is my primary concern. And with a lot of uncertainty surrounding the outcome of the renewed pay negotiations, I’m going to stay on the sidelines for now.

The post The Royal Mail share price has crashed by 30%! Buy the dip? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.





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