Royal Mail : first class performance but second class earnings?

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After a good run, Royal Mail shares look ripe for some profit-taking, although the underlying business remains relatively sound.

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Royal Mail's earnings will be one of the more interesting events of the week, given the former state-postman is still struggling to overcome serious headwinds in costs and in competition from parcel delivery rivals.

Analysts are expecting pre-tax profit of £430 million, a rise of 7.4% for the year to the end of March, although revenues are expected to fall 1% to £9.2 billion. This, however, would represent a small victory in cost-cutting terms, with reductions in expenses a necessary evil given ongoing problems in its parcel delivery arm.

Its rivals have opted to push investment in technology, and being smaller than Royal Mail have been able to reap the benefits much more quickly. But Royal Mail also faces competition from the other end of the spectrum, as Amazon expands its own operations in the UK.

Underlying earnings, as opposed to the pre-tax headline figure, are expected to fall 10% to 38.73p a share, although dividends are expected to rise, to 21.7p from 21p a year earlier, pushing the firm’s yield up towards 4.8%, ahead of the FTSE 100’s 4.5%.

At around 12 times forecast earnings the shares do not look too expensive, but they do require a belief that RM will shake off its competition woes and survive any ongoing downturn in the parcel delivery division.

Royal Mail shares have steadily trended higher since the February low, when they could be picked up for less than 420p. Crucially, they have broken through 494p, an area which stymied progress back in November/December 2015. A pullback may find support towards the 50-day simple moving average (currently 478p), and with stochastics currently overbought we may see a degree of profit taking following the results.