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Royal Mail faces a difficult path

The performance of Royal Mail since its IPO back in 2013 has seen a fairly decent return despite scepticism at the time about its profits and earnings forecasts looking out three years into the future.

Putting to one side its loss making letters division the parcels division faces huge competitive pressures from peers like UK Mail, Fedex, UPS and Amazon as consumers look for more flexibility in terms of delivery options.  At the end of 2014 consensus projections for revenues and pre-tax profits were for the ended March 2015 were for £9.5bn and £447m. These numbers have come in quite substantially with expectations now for revenues of £9.3bn and pre-tax profits of £400m.

While these numbers are still fairly good given the competitive environment, the company could well be getting to its limits with respect to cutting costs as talks with the trade unions on salaries and working hours gets under way. With a wage bill in excess of £5bn and the parcels market set to get even more competitive management are likely to find the easy wins of the post IPO era much harder to come by.

With a dividend cover of 2 and a dividend yield of 4.2% the shares do look attractive however forward revenue projections continue to look optimistic with revenues predicted to increase modestly against a significant rise in profits in excess of 20%.

This would suggest that with the share price at nine month highs the potential for disappointment is probably tilted to the high side.  

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