Royal Mail’s parent, International Distributions Systems (LON: IDS) share price pulled back sharply on Monday after analysts at JP Morgan downgraded it. The stock dropped to a low of 219p, which was much lower than this month’s high of 250p.
Royal Mail woes continue
IDS, the parent company of Royal Mail Group, has been a company under pressure in the past few months. Demand for both parcels and mail has continued thinning while the company’s cost of doing business has remained at an elevated level.
Data published last week showed that UK’s inflation rebounded in February as the cost of most items rose. Higher inflation, especially in the energy sector, hits Royal Mail hard considering that the company spends a lot of money on fuel expenses.
At the same time, the company has been pushed to hike wages even as its profitability remains on edge. In fact, the management is considering separating its Royal Mail business with its other profitable global logistics segment.
Royal Mail has also attracted the attention of regulators. Last week, the company was referred to Ofcom by a committee of parliament for failing to deliver letters six days per week. This is one of the top challenges that the company faces in that the firm must deliver letters six days per week and even in some of the most unprofitable places in the country.
Therefore, there is a likelihood that the IDS share price will continue falling in the coming month as its profitability remains on edge. Another key challenge is that Royal Mail is one of the most bloated companies in the UK, with over 162k workers. This explains why analysts at JP Morgan decided to slash its estimate from 285p to 250p.
IDS share price forecast
IDS stock chart by TradingView
IDS stock price has done relatively well this year even as the company remains at risk. The stock has jumped by over 11% from the lowest level this year. However, recently, the shares have moved slightly below the 25-period and 50-period moving averages. A closer look shows that it has formed a head and shoulders pattern.
Therefore, the shares will likely have a bearish breakout as sellers target the key level at 200p, which is about 11% below the current level. A move above the key resistance point at 235p will invalidate the bearish view.
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