Are Royal Mail shares overheated?
Although JP Morgan's price adjustment for Royal Mail is decidedly modest, it could be the beginning of an overdue cooling down for what has been one of the hottest UK stocks of the year. Royal Mail has gone from being dead weight to a clear market favourite in just over a year, with the share price increasing 355% between March 2020 and June 2021, from 133p to 606p.
Since then, this white-hot growth has already cooled off, with the Royal Mail share price declining to 424p per share as of market opening on 1 November 2021. Nonetheless, shareholders remain upbeat. JP Morgan has stuck with its "overweight" rating, while the market consensus among other major investment banks is that Royal Mail will outperform expectations over the next year. It seems that Royal Mail is most definitely still in the good graces of investors.
Does the Royal Mail face another challenging winter?
In JP Morgan's price forecast, it noted that Royal Mail has a few factors in its favour that may push its share price up further. For one, JP Morgan expects letter and parcel volumes to be higher than usual in the coming months, which would be in line with how last winter played out.
For its part, Royal Mail expects its busiest Christmas season ever, which is why it has made moves to hire 20,000 extra workers ahead of the December rush. Furthermore, JP Morgan also acknowledged that Royal Mail is less vulnerable to the inflationary pressures hitting the private mail sector in the UK, especially with regards to the wage inflation that is eating into bottom lines and share prices across the economy right now.
However, it is also worth noting here that Royal Mail's future share price could be weighed down by its public-facing nature, as it is obligated by the British Government to provide a certain level of service across the UK, giving it less flexibility than its competitors.
Royal Mail's overseas expansion steams ahead
Moving beyond its UK operations, Royal Mail is continuing its unprecedented expansion into overseas markets. On 16 October 2021, Royal Mail completed its acquisition of the Canadian shipping giant Rosenau Transport.
This was part of a £210 million deal in which Rosenau will be used to link Royal Mail's Canadian operations with its services in the United States. If its international expansion continues at this pace, it could certainly bolster its share price back home.
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Disclaimer: All trading carries risk. Any past performance stated is not an indication of future performance.