Should You Investigate Royal Mail plc (LON:RMG) At UK£4.14?

While Royal Mail plc (LON:RMG) might not be the most widely known stock at the moment, it saw significant share price movement during recent months on the LSE, rising to highs of UK£5.79 and falling to the lows of UK£4.04. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Royal Mail's current trading price of UK£4.14 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Royal Mail’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

View our latest analysis for Royal Mail

What is Royal Mail worth?

Great news for investors – Royal Mail is still trading at a fairly cheap price according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 6.67x is currently well-below the industry average of 19.28x, meaning that it is trading at a cheaper price relative to its peers. However, given that Royal Mail’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

What kind of growth will Royal Mail generate?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. However, with a negative profit growth of -2.2% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Royal Mail. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Although RMG is currently trading below the industry PE ratio, the negative profit outlook does bring on some uncertainty, which equates to higher risk. Consider whether you want to increase your portfolio exposure to RMG, or whether diversifying into another stock may be a better move for your total risk and return.

Are you a potential investor? If you’ve been keeping tabs on RMG for some time, but hesitant on making the leap, I recommend you research further into the stock. Given its current price multiple, now is a great time to make a decision. But keep in mind the risks that come with negative growth prospects in the future.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Royal Mail is showing 4 warning signs in our investment analysis and 1 of those is concerning...

If you are no longer interested in Royal Mail, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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