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Royal Mail shares are up 150%! Should I buy now?

first_img Roland Head 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. Royal Mail shares are up 150%! Should I buy now? Roland Head | Sunday, 22nd November, 2020 | More on: RMG Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. Our 6 ‘Best Buys Now’ Shares The Royal Mail (LSE: RMG) share price has risen by 150% from the record low seen in April. But the postal operator’s stock is still down by more than 50% from the high of 631p in May 2018.The shares received a boost last week when half-year results showed that revenue from parcels exceeded letter revenue for the first time.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…However, the reality is that the group’s profits have collapsed this year. Royal Mail reported a pre-tax profit of £17m for the first half of the year, down from £173m last year. In my view, management still have some tough problems to fix.3 reasons why I’d buy Royal Mail sharesI’m going to start with a look at some of the things that I like about Royal Mail.Firstly, this 500-year old firm is a trusted brand that’s recognised by everyone in the UK. The postal service’s legal obligation to deliver to every address means that Royal Mail already has a delivery network that stretches across the country.Another attraction for me is that the group already has a big share of the parcel market. This should make it easier to achieve economies of scale and to compete on costs with rival parcel firms.Finally, although Royal Mail is the best-known part of the group, it also contains a second business. Parcel group GLS trades as Parcelforce in the UK, but also operates in Europe and the US. GLS is growing fast and generated an attractive 9% operating profit margin during the six months to September. I see GLS as a valuable asset for Royal Mail shareholders.I’m still worriedDespite these attractions, I do have some concerns that may stop me buying Royal Mail shares.The firm has been struggling to modernise its operations for several years. A lot of letters are still manually sorted. Parcel operations are outdated, too. Only 33% of parcels are sorted automatically today.Two new automated parcel hubs are being built in the North West and Midlands. But they aren’t due to complete until 2022 and 2023, respectively. In the meantime, the shift from letters to parcels is proving expensive. Royal Mail said that this change of mix cost £95m during the first half of the year. I can see these costs continuing for some time.Another concern is the universal service obligation, which requires letter delivery to every UK address six days a week at a fixed price. With letter volumes falling, this is becoming harder to operate profitably. Letter volumes are unlikely to recover, so changes may be needed.Negotiating these changes with the regulator and the group’s employee unions could be difficult. I think it could slow down Royal Mail’s recovery.Royal Mail shares: My decisionI’m confident that Royal Mail will survive and adapt. But I don’t know how long this process will take or what it will cost.In my view, the outlook for Royal Mail shares is uncertain. After recent gains, the shares are priced at 16 times 2021–22 forecast earnings. That seems high enough to me, given the challenges faced by management. I’m staying on the sidelines for now. Click here to get access to our presentation, and learn how to get the name of this ‘double agent’! There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!center_img Enter Your Email Address Simply click below to discover how you can take advantage of this. Image source: Getty Images Don’t miss our special stock presentation.It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.That’s why they’re referring to it as the FTSE’s ‘double agent’.Because they believe it’s working both with the market… And against it.To find out why we think you should add it to your portfolio today… I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. See all posts by Roland Headlast_img read more