Why Royal Mail plc (LON:RMG) Could Be Worth Watching

While Royal Mail plc (LON:RMG) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price increase on the LSE over the last few months. With many analysts covering the mid-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. But what if there is still an opportunity to buy? Today I will analyse the most recent data on Royal Mail’s outlook and valuation to see if the opportunity still exists.

Check out our latest analysis for Royal Mail

Is Royal Mail still cheap?

The stock seems fairly valued at the moment according to my valuation model. It’s trading around 1.1% below my intrinsic value, which means if you buy Royal Mail today, you’d be paying a fair price for it. And if you believe that the stock is really worth £5.18, then there’s not much of an upside to gain from mispricing. Although, there may be an opportunity to buy in the future. This is because Royal Mail’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.

What does the future of Royal Mail look like?

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 an extremely negative double-digit change in profit expected over the next couple of years, near-term growth is certainly not a driver of a buy decision. It seems like high uncertainty is on the cards for Royal Mail, at least in the near future.

What this means for you:

Are you a shareholder? RMG seems fairly priced right now, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on the stock, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on RMG for a while, now may not be the most advantageous time to buy, given it is trading around its fair value. The stock appears to be trading at fair value, which means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystalize your views on RMG should the price fluctuate below its true value.

If you'd like to know more about Royal Mail as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Royal Mail you should be mindful of and 1 of these is a bit 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.