Is the Royal Mail share price a bargain or should I buy this dividend-growing mid-cap?

Ahhh! There’s nothing quite like a collapsing share price to get the old value-receptors twitching, and we’ve certainly seen a plunge from Royal Mail (LSE: RMG) recently. In May, the shares were trading above 600p, today they languish around 347p due to declining earnings and difficult trading conditions.

Cheap for a reason?

At first glance, the valuation indicators look attractive. With the share price close to 347p, the forward price-to-earnings (P/E) ratio sits near 10, and the forward dividend yield is around 7.5%. But I think the firm deserves its low rating and I wouldn’t touch the stock with a barge pole. I said in an article in August that the firm’s business looks unattractive because the letter service is in structural decline and the parcel business operates in a highly competitive market.

I see no point whatsoever in treating the stock as a long-term buy-and-hold investment because earnings are fluctuating as the business struggles to survive. Instead, I’d rather take my chances with international recruitment consultancy Pagegroup (LSE: PAGE), which has been posting some impressive figures lately.

Today’s third-quarter trading update reveals constant currency gross profit up almost 20% compared to the third quarter last year. Most regions are doing well, with gross profit up in percentages measured in the late teens and early twenties, apart from the UK where the improvement was only 0.8%. However, the firm’s performance in Britain won’t make or break the company. During the period, around 46% of profits came from Europe, the Middle East and Africa, 22% from the Asia Pacific region, 17% from the UK, and 15% from the Americas.

Growth on the agenda

Pagegroup is making hay while the sun is shining and added 242 new fee-earners in the quarter, taking the total headcount to 7,718. Growth is very much on the agenda and chief executive Steve Ingham said in the report that the firm is aiming for its vision of a “10,000 headcount, £1bn of gross profit, and £200m-£250m of operating profit.” 2018 operating profit, he said, should come in “marginally ahead of the consensus of current market forecasts.”

“Ahead” statements are nearly always welcomed by the stock market and I reckon the strong operational progress we are seeing could go on to drive the shares higher. City analysts have robust growth in earnings pencilled in close to 20% for this year, and again for next year. Meanwhile, at today’s share price of 549p or so, the forward P/E rating for 2019 is just over 15, and the forward dividend yield is a tempting-looking 5.3%. If the company can keep up its growth rate, I think the valuation looks fair.

Of course, the recruitment industry suffers from the effects of cyclicality, but there’s no sign of any weakness in trading right now. In fact, the opposite is true. Business is booming and the company has been rewarding investors with a rising ordinary dividend and special dividend payments over several years. I’d much rather go for a fair price with a strong underlying business like Pagegroup than a low valuation and a weak underlying business such as Royal Mail.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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