It’s been a rocky road for Royal Mail (LSE: RMG) so far in 2022. Having fallen over 50% year to date, the stock currently sits at just 259p. This fall in share price movement and subsequent shrinking of its market cap pushed the company out of the FTSE 100 index in June this year. Broadening the horizon to a 12-month span, the shares have tanked 47%. So, with this in mind, is now the time to buy the shares? Or should I avoid adding this FTSE 250 UK courier to my portfolio?

Union action

One of the most pressing issues plaguing the group is the threat of strike action. Royal Mail has been in a long dispute with the Communication Workers Union (CWU) over pay. With no firm agreement reached, it was announced that Royal Mail workers would strike for four days in the next few weeks.

The strikes come after months of red-hot inflation, which most recently hit 10.1% in the UK in July. Rising prices are vastly outpacing wages and magnifying the cost-of-living crisis. It’s estimated that 115,000 workers will partake in the strike action, which will place momentous pressure on Royal Mail’s operations.

Disruption to operations is a short-term issue, but I still expect a big impact on the firm’s revenues. However, over the long term, it places even more pressure on the group to reform pay packages. Royal Mail currently employs around 180,000 staff. Even a small increase in wages would add millions in operating costs. The courier operates with slim 5% profit margins, so higher wage costs for it are a big issue.

Interest rate pressure

With inflation and interest rates on the rise, it has created a far from favourable market environment for Royal Mail. The group has high debts, low cash flow, and is loss-making. This makes it a pretty risky investment. As rates rise, people turn away from speculative assets like risky stocks and pour their money into safer ones. As rates continue to rise, this could put additional pressure on Royal Mail shares. Also, with over £900m net debts on its balance sheet, and those thin margins, rising rates are something the group simply cannot afford.  

A bargain buy?

One positive I see for Royal Mail shares is their cheap valuation. Currently trading on a price-to-earnings ratio of just 4, the stock looks astonishingly cheap – especially considering the FTSE 100 average P/E ratio of 14. In addition to this, it packs a meaty 6.4% dividend yield, which could be great for adding passive income to my portfolio and acting as an inflation hedge.

Yet while the shares are cheap and the dividend is high, there are too many red flags for me to buy this stock. Strike action poses a big threat to the firm’s income, as well as potentially forcing it to vastly increase its expenditure. Inflation and interest rates pose a similar threat. For those reasons, I won’t be buying any Royal Mail shares today.

The post Should I snap up Royal Mail shares at 259p? appeared first on The Twelfth Magpie.

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Dylan Hood 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.

Director dealings are essentially insider transactions for shares between directors and the companies they work for. These dealings are always made public, and are often considered a good indicator of a company’s future prospects. However, they don’t get nearly as much attention as other company news due to their complex nature. Nonetheless, here I’m breaking down this week’s biggest director dealings from three FTSE firms.

Aviva

Aviva (LSE: AV) is a British multinational insurance company. It has millions of customers across its core markets. Aviva is also the UK’s largest general insurer. This week, an influential director purchased shares through the firm’s Global Matching Share Plan.

• Name: Jason Storah
• Position of director: Chief Executive Director
• Nature of transaction: Partnership shares and matching shares
• Date of transaction: 15 July 2022
• Amount bought: 38.413602 @ £3.93
• Amount received: 76.827204 @ £3.93
• Total value: £452.70

Royal Mail

Royal Mail (LSE: RMG) is Britain’s biggest postal service and courier company. The group runs the brands Royal Mail and GLS. It released its Q1 trading update this week. Two director dealings also occurred.

• Name: Mick Jeavons
• Position of director: Chief Financial Officer
• Nature of transaction: Free shares (Deferred Share Bonus Plan 2019)
• Date of transaction: 18 July 2022
• Amount bought: 14,132 @ nil
• Total value: £N/A

• Name: Katherine Amsden
• Position of director: PCA of Mark Amsden, Group General Counsel and Company Secretary
• Nature of transaction: Purchase of shares
• Date of transaction: 21 July 2022
• Amount bought: 34,262 @ £2.92
• Total value: £99,977.21

Deliveroo

Deliveroo (LSE: ROO) is a British online food delivery company. It operates in over 200 locations across the UK and internationally. In the UK, it is the second-biggest food delivery platform. In this week’s transaction, a director exercised their option to redeem stock compensation.

• Name: Adam Miller
• Position of director: Chief Financial Officer
• Nature of transaction: Free shares
• Date of transaction: 15 July 2022
• Amount received: 83,400 @ £0.85
• Total value: £70,973.40

• Name: Adam Miller
• Position of director: Chief Financial Officer
• Nature of transaction: Sales of shares to cover tax liabilities
• Date of transaction: 15 July 2022
• Amount sold: 40,407 @ £0.85
• Total value: £34,345.95

Types of shares in a SIP

To provide context, there are a few types of shares within a company’s share incentive plan (SIP). A SIP is an employee plan for companies within the UK to flexibly award equity to employees. Publicly listed companies normally exercise this option because it’s tax-efficient for both the employer and its employees.

In this week’s director dealings, Aviva’s CEO opted to purchase partnership shares. Partnership shares give employees the opportunity to buy shares via deductions from their salary, before tax deductions. But where partnership shares are offered, the company can also offer matching shares. This can range up to a maximum ratio of two free matching shares per partnership share purchased, as was the case. That being said, it’s important to note that matching shares must normally be held in a trust for at least three years, and held for five years in order to receive full tax relief. However, these shares may be forfeited if an employee withdraws their partnership shares from the trust.

On the other hand, the Royal Mail CFO received free shares. This occurred under the company’s Deferred Share Bonus Plan from 2019. Having said that, the director is expected to retain their share-based awards until they achieve an equivalent of 200% of their salary.

As for Deliveroo’s CFO, he received free shares. These are a form of restrictive stock units (RSU). RSUs are a form of stock compensation. It is a promise from the company to award a company’s shares in the future. RSUs are most often used in younger companies. This is because cash on its balance sheet is used to grow the business instead.

The post Director dealings: Aviva, Royal Mail, Deliveroo appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. 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.

Seeing red

Once a pandemic darling, the tailwinds that brought the Royal Mail share price close to its all-time high have now dissipated. As such, the group saw a tremendous slowdown in revenue growth in the past year. A 0.6% increase in total revenue wasn’t enough to please investors as operating profit, basic earnings per share (EPS), and free cash flow, all saw declines.

Additionally, management mentioned an uncertain outlook for the year ahead. The board cited wage inflation, sharp increases in energy and fuel costs, low GDP growth, and the downturn in consumer spending to create significant headwinds for the year ahead. To make matters worse, the FTSE 250 firm is still in dispute with its workers over its latest pay round, with threats of strike action.

Royal rebound on the cards?

Taking all those factors into account, analysts have revised their FY23 earnings for the firm downwards. Expected EPS now stands at 44.8p, with revenue for the year at £12.69bn. But if Royal Mail can provide a positive trading update tomorrow with upbeat guidance, a potential rebound could be on the cards.

Admittedly, stalling retail sales data in the past quarter doesn’t bode well for Royal Mail shares. However, there are glimmers of hope that the firm may not be as badly affected as initially thought. A recent report by the Office for National Statistics provided a couple of positive takeaways.

Generally, the public is buying less food, putting off delayable spending and is less like to spend money going out. However, spending on hobbies and home improvements has gone up, with people sticking with online shopping. Shopping and spending habits may be ‘incredibly positive’ for the consumer. Online purchases have been consistently above pre-pandemic levels since October 2020.

Source: Office for National Statistics

To complement this, the latest results from packaging company DS Smith were encouraging too. Revenues were up 21% on an annual basis, with management attributing the improvement to higher demand for cardboard boxes, like those Royal Mail often delivers. Even though DS Smith’s results may not have a direct correlation, it does show that packages are still in high demand. And I’d assume that Royal Mail would benefit to some extent from delivering such parcels.

Can it deliver?

Taking everything into consideration, would I still buy Royal Mail shares before its earnings results? Well, despite the potential swing of the pendulum in its share price, there are still a couple of caveats I can’t look past.

For one, labour strikes are still very much a possibility despite unions suspending strikes for the time being. Talks could come to an unwanted conclusion, and would massively impact the company’s business operations. Moreover, with inflation getting higher, it’s becoming more likely that consumer discretionary spending continues to decrease. And while the group’s GLS division has been boasting consistent and steady growth, I’m doubtful that this can pull the entire company’s weight for the long term. Therefore, I won’t be buying Royal Mail shares until we see a more certain economic landscape.

The post Should I buy Royal Mail shares before its earnings results? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. 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.

Earnings results are a great way for investors to judge a company. They’re used to determine whether companies are on track with their initial guidance. These results can often radically move share prices in either direction, depending on the numbers reported. So, here’s an earnings preview for three FTSE firms reporting results this week.

It’s always best to compare firms’ new quarterly/half-year numbers to those from prior years. But certain revenue figures may have been impacted by the pandemic, so it’s important to get context from pre-pandemic levels too. The new figures that are due can also be useful to determine whether a company can perform better than its previous year’s numbers, or if it can beat analysts’ annual forecasts. It’s a shame that analysts in the UK don’t normally publish earnings previews for quarterly or half-year periods.

Royal Mail (Q1 trading update)

Royal Mail (LSE: RMG) is Britain’s biggest postal service and courier company. The group runs the brands Royal Mail and GLS (an international logistics company). The FTSE 250 firm is expected to provide a trading update for its most recent Q1 performance ending June 2022 on Wednesday 20 July. The company’s financial year ends in March 2023.

Analysts covering Royal Mail are predicting a slowdown in both its top and bottom lines for the current financial year. The board painted a gloomy picture for the group in its Q4 earnings call, which sent the share price crashing. Lockdown tailwinds have dissipated, and the logistics group is locked in discussions with staff over its latest pay round, with the threat of possible strike action. Pair that with a slowing British economy and high fuel costs, and it seems to me that the only way for its share price to go is down. Making matters worse, EPS for its current year has seen a steady decline from £0.54 to £0.45 over the last 90 days. Nonetheless, if revenue figures come in above 2020 levels, there could be a surprise rally.

Howden Joinery (H1 earnings)

Howden Joinery (LSE: HWDN) is the UK’s number one trade kitchen supplier. It provides thousands of products across kitchens, joinery, and hardware. The FTSE 100 firm is expected to post its half-year earnings for its six months performance ending June on 21 July. The company’s financial year ends in December 2022.

The overall consensus is that Howden Joinery is expected to continue growing its top and bottom lines. Analysts have also revised their EPS targets for the current year upwards, by nearly £0.01 in the last 90 days. That being said, investors will be paying attention to the guidance provided on Thursday in order to determine whether the supplier can beat its previous year’s record figures.

Dunelm (Q4 trading update)

Dunelm (LSE: DNLM) is a British home furnishings retailer that operates throughout the UK. It’s one of the largest homewares retailers in the country with an ever growing market share. The FTSE 250 firm will be posting its Q4 trading update for the period ending June 2022 on Thursday 21 July. The company’s financial year ends in June 2022.

While public listed companies normally release their full year results along with their Q4 numbers, Dunelm will only report its FY earnings on 14 September. This is most likely due to its financial year only ending three weeks ago. Therefore, the trading update will be more akin to an earnings preview.

Having said that, the revenue figure will be watched closely as specific bottom line figures will only be released in September. Comments from the board will also be closely monitored as investors look to determine whether EPS estimates will be met. Nevertheless, analysts have revised their EPS targets from £0.79 to £0.80 in the last 90 days. Despite that, a slowdown in retail sales in the last quarter should be kept in mind. It may have impacted Dunelm’s top line figure, along with higher fuel and labour costs. These macroeconomic factors could see analysts’ EPS being revised lower, if management hints at lower margins in the trading update.

The post Earnings preview: Royal Mail, Howden Joinery, Dunelm appeared first on The Twelfth Magpie.

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John Choong owns shares of Dunelm. The Motley Fool UK has recommended Howden Joinery Group. 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.