The Royal Mail (LSE:RMG) share price took the biggest hit in the FTSE 100 yesterday. Shares in the company were down 8.8%, to trade at 440p. Although this week we are seeing a broad-based sell-off across global stock markets, this individual move seems high. Here are two reasons that I can see for it.
Fears around supply disruption
The first reason I think the Royal Mail share price is taking a hit is due to the supply chain issues in the UK. This includes fears of both a shortage of lorry drivers and a perceived shortage of fuel.
The situation in the UK has been well-documented in recent days, with investors clearly uncertain as to what this means for a company like Royal Mail. We’re heading into Q4, traditionally the busiest period of the year for the firm given the festive season.
It wouldn’t surprise me to see rising energy costs provide a headwind to Royal Mail through to the end of the year. A shortage of drivers could also cause headaches. This is especially valid considering the company usually hires additional temporary workers during this time of year to cope with demand!
Concerns around a slowing parcels business
The second reason I think the Royal Mail share price is falling stems from the trading update that was released late last week. It showed total parcels volumes down 12% versus the same period last year. Letters volumes were up 13% versus last year but down 19% versus pre-pandemic levels from 2019.
I think the concern here is that a lot of the growth from last year was from parcels, largely due to the pandemic. As pressures from the pandemic ease, a slowdown here could materially impact the business into the future.
Hopefully the business can rebase the expectations of investors to a more sustainable level going forward, as the business model is still sound. Yet I think the move lower in the Royal Mail share price since the results is due to investors repricing the stock to what they believe the company is worth.
Staying away from Royal Mail shares
Despite the hit to the Royal Mail share price in the short term, it would have still doubled my money had I bought some shares a year ago. So I think the move needs to be taken with a pinch of salt.
The company has come a long way thanks to the restructuring last year and does have many points that make it an appealing buy. Yet given the size of the move higher already, I would be tentative about buying right now, even with the slump yesterday.
The two concerns mentioned above could become serious issues in coming months, so I’d like to wait and see how the business navigates Q4 before deciding whether to jump in or not.
jonathansmith1 and The Motley Fool UK have 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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