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Royal Mail earnings outlook

Last time Royal Mail reported results, shares hit 52-week highs but have slipped since Brexit. A risk for Royal Mail is that a slowdown in the economy will lower both personal and business parcel volumes.

Royal Mail’s European parcel delivery business was a source of revenue growth in its last report. Since then the positive FX translation of European earnings with a weaker pound will support profitability.

Royal Mail needs to continue its inroads into UK parcel delivery and offset declining letter deliveries, but faces intense competition in doing so. As an example, Parcel2go recently surpassed Royal Mail with the cheapest 2 kg deliveries.

In the last update, cost cutting and productivity gains helped protect margins in UK letters. Tough wage and pension negotiations with its unionised workforce coupled with the need for capital expenditure may curtail how far cost-cutting can go.

The price chart below shows that shares were unable to sustain upwards momentum near 550p. The sharp dip to 470p has not been followed by a higher high and the price now sits below 580p. A drop below 470p could see the price fall further to the February lowand Fibonacci level near 412p.

source CMC Markets, 10/11/16

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Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.