Royal Mail (LSE: RMG) shares have recently experienced a significant pullback. Since early June, the RMG share price has fallen from 615p to 412p – a decline of 33%. We need to put this fall in perspective however. Over a 12-month timeframe, the stock is still up around 70%.
So why is Royal Mail’s share price falling? And, more importantly, can it recover from here?
Why Royal Mail shares are falling
There are a number of reasons RMG shares have fallen recently, in my view. The first is that parcel volumes have declined as lockdown restrictions eased.
Back in July, the company said parcel volumes in its UK business fell 13% year-on-year for the three months ended 30 June (but were up 19% from the corresponding quarter in 2019).
More recently, in September, the group said domestic parcel volumes for the five months to the end of August were down 5% year-on-year (but up 34% on the same period in 2019) while total parcel volumes were down 12%.
The sharp rise in parcel volumes during Covid-19 was one factor that pushed Royal Mail’s share price higher. Essentially, investors were viewing RMG as a play on the growth of e-commerce. Now that volumes are declining and investors are focusing more on ‘reopening stocks’, the share price is retreating.
Rising costs
Another issue is that costs are rising. In its most recent trading update, Royal Mail said it’s seeing “some upward pressure on costs” in a number of its markets. It noted that these are due to tighter labour markets and more general inflationary pressures.
This is obviously not ideal as higher costs hit profits. However, it’s worth noting that rising costs are affecting a wide range of companies at present. Royal Mail certainly isn’t the only one to be impacted.
Lower share price targets
A third issue is broker sentiment. Recently, analysts at UBS downgraded Royal Mail from ‘buy’ to ‘sell’ (a double downgrade). The broker – which cut is share price target to 440p from 590p – said that risks to operating expenses are increasing with potential pricing pressure in the UK parcel division.
Meanwhile, a few months back, analysts at Credit Suisse cut their share price target to 581p from 647p. This kind of broker activity can impact a stock negatively.
2020 share price rise
Finally, I think the recent share price weakness is related to the huge share price rise last year and early this year. Between April 2020 and early June 2021, Royal Mail’s share price experienced a massive rally, rising from around 125p to around 615p. That represents a gain of almost 400%.
After that kind of performance, some profit taking was to be expected.
Can RMG shares recover?
As for whether Royal Mail’s share price can recover, I think it has the potential to do so in the medium term. In the short term, there are several things that could hold the share price back. Higher costs are one. A shift into reopening stocks is another.
However, looking further out, the company should benefit from the growth of the UK e-commerce industry. This should boost profits, and the share price, over time.
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Edward Sheldon 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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