So far this year Rolls-Royce (LSE: RR) has been hit hard. The Rolls-Royce share price is down over 60%. It also missed out on the rally following the UK election last year. The problems the company faces, which pre-date the pandemic, have been made worse by the devastating effects of Covid-19 on the aviation industry. This industry is a major customer for Rolls-Royce.
Rolls-Royce shares: cheaper but facing problems
Although buying a fallen share can be tempting, it’s not without risk. Even after a 60% fall, the RR share price can (and in my opinion, likely will) fall further.
The main reason is that Rolls-Royce needs aircraft to be flying as it sells engines at a loss. Instead it makes its money from aftercare services and maintenance. This now makes Rolls-Royce a lot less money as planes are flying less. This situation is unlikely to change any time soon as I don’t see sentiment that could help the share price improving.
To add to its owes, recently, the engineer has found signs of wear in compressor blades used in its Trent XWB-84 engines. This is another engineering failure after the company has spent more than £2bn dealing with faults in its Trent 1000 engines.
Its customers need reassurance that they can trust Rolls-Royce. Engineering is a competitive business and eventually these mistakes will see customers exiting. The firm needs to up its game to keep its reputation.
Another reason for concern is that a large investor, ValueAct, has just sold its entire stake, probably at a significant loss. Insiders apparently expressed frustration that six years of restructuring haven’t delivered better performance, as the latest engines issues show.
The problems are likely to continue
The current woes are hitting the balance sheet hard. Moody’s, the US credit agency, has cut Rolls-Royce’s rating to that of junk. It expects “substantial” cash outflows as the engine-maker takes a hit from the coronavirus pandemic. Moody’s cut the long-term senior unsecured rating of Rolls-Royce to Ba2 from Baa3 and maintained a ‘negative’ outlook.
This will make it harder and more expensive to raise capital. Coinciding with reduced revenues and ongoing uncertainty in its key markets I think the Rolls-Royce share price could continue to be squeezed. And with little demand for the shares in the current environment, I think they could fall further.
That makes them too risky for me. Indeed according to shorttracker.co.uk two funds are shorting the shares and this also concerns me.
There could be a turnaround down the line, but for the time being, the Rolls-Royce share price doesn’t appeal to me. The aviation industry is unlikely to improve soon so I see no reason why the shares will be any different. Any bad news on the covid front could really stick the knife in and see the share tank.
