When I wrote about the mail and freight deliver company Royal Mail (LSE: RMG) in late September, its stock was flying high. It had just released a robust trading update and was optimistic about its prospects. On 27 September, its share price was at a high of 485p. But just a few days later, it had pretty much fallen off a cliff.
It showed a 16% drop, resulting in the share price hitting the lowest levels in a year. The stock has inched up recently, but is still nowhere near the highs of last month. This may be partly explained by FTSE 100 weakness in the beginning of October, which dragged many stocks down. But now, the index has made substantial gains. It even went back to pre-pandemic highs earlier this week.
The Royal Mail share price continues to languish, however. What is going on here?
Driver and fuel shortage
I think investors may have become nervous on account of a shortage of lorry drivers, which could impact logistics companies. The Road Haulage Association, a trade body, estimates there is a shortage of 100,000 drivers. According to the association, this has led to a supply chain crisis the likes of which we have not seen in decades, reports the Financial Times.
Additionally, fuel shortages may have exacerbated investor skittishness about the Royal Mail stock, since these could have a bearing on delivery providers’ ability to carry on business as usual. While Royal Mail had assured that it had no such shortages, investor perception may be different.
Acquisition woes?
Further, Royal Mail also recently made an acquisition. Its Dutch subsidiary, GLS, has acquired Canada’s Mid-Nite Sun Transportation for £210.5m. The acquisition will be completed before the end of the year and will be financed through cash and borrowings. Typically, stock prices tend to fall when companies make acquisitions. In the short term, they represent outflows for the acquiring company. And they also bring some degree of uncertainty, because there is always the risk that such integrations may not work out.
That said, they can also work out very well. In this case, Mid-Nite Sun Transportation allows GLS to expand its networks not just in Canada but also the to west coast of the US. I like the timing of the buy. It comes when Royal Mail has performed well, so it is in a better place to fund the acquisition than before. And its past challenges with its strong labour union have also been overcome, which means that it can focus more on expansion.
What’s next for the Royal Mail share price?
There is always the likelihood that things can still go wrong. If the economic recovery remains lacklustre or supply chain issues remain unchecked, the company could experience some reversal in fortunes. Considering that it has just made an acquisition, it may be more vulnerable if there are hits to its financials.
So far though, I am more optimistic than not that things can continue to go well on the whole for the Royal Mail. In fact, I believe that the share price dip is a buying opportunity for me.
Manika Premsingh 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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