While rising prices will inevitably hit Royal Mail PLC (LSE:RMG), there are a number of potential offsets that might mitigate their impact on profitability, says a leading Wall Street bank that thinks the shares are just too cheap.
JP Morgan, in a note in which it revisited the story, believes letter volumes could be stronger than anticipated, while the market price for parcels may be driven up by rivals struggling to cover rises in the national minimum wage. RM is less exposed to wage inflation than some of the competition, JPM points out.
It also believes that RM’s tracked parcel service has the potential to positively impact the bottom line.
“If we are correct, and group profit can continue to rise, we think six-times p/e [price to earnings ratio] is clearly far too low, with our target price giving almost 100% upside,” the London arm of the investment bank said.
That price target is 804p, down from 815p previously. The shares, up 1.4% in late morning trade, were changing hands for 426.5p.