At 155p, is the Rolls-Royce share price too cheap?

The Rolls-Royce share price is down nearly 80% this year. But with a potential share issuance on the horizon, has it got further to fall?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

At the start of the year, the Rolls-Royce (LSE: RR) share price was nearly 700p. Nine months later, and the iconic British engineering company has fallen nearly 80%. This is mainly due to its links with the aviation industry, which led to the firm posting a net loss of $5.4bn for the first half of 2020. But with the company managing to minimise some costs, and with its reputation for excellence, are the shares now too cheap to ignore?

Civil aerospace division

The bulk of the losses were in the company’s civil aerospace division. This is because the group produces and services aircraft engines. The current lack of flights taking off, landing and engines needing to be serviced has therefore hit revenues hard. It also charges a fixed amount on a per-flying-hour basis, and this meant that the grounding of planes was another factor in the dismal half-year results.

With the aviation industry in turmoil, the firm has since stated that it does not expect a recovery to 2019 levels until the middle of the decade. As a result, I cannot see the Rolls-Royce share price recovering to its former level, especially with the burden of over £1.7bn of net debt. The amount of debt on the balance sheet is also a figure that I expect to continue increasing.

Should you invest £1,000 in Capita Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Capita Plc made the list?

See the 6 stocks

Are there any positives?

Fortunately, it’s not all negative. For example, its role in the defence sector does look reliable, as shown by its recent revenue rise of 2%. Operating profits in the defence sector were also able to rise 19% to £210m. Although defence only makes up a fraction of Rolls’ business, it’s still a positive sign to see it performing well. It could therefore help offset some losses in the next few years.

The group has also been able to cut costs through its restructuring efforts. In fact, the company is looking to cut around 9,000 jobs by the end of the year, saving around £1.3bn by the end of 2022. In addition, it is considering selling the ITP Aero business as a way of improving the balance sheet.

This means that although I cannot see the Rolls-Royce share price making a full recovery, there are indications that it may be oversold, and the future is not as bad as some may think.

So is the Rolls-Royce share price too cheap?

Considering Rolls’ reputation for excellence, its small market-cap of just £3bn does seem unfair. Saying this, I do still believe that the Rolls-Royce share price has further to fall. This is mainly because the company has already confirmed that it will need to raise more money. A large figure of around £2.5bn has been stated. With is credit rating cut to junk status, the firm will probably have to resort to issuing more shares. Although this will help boost liquidity, it will also have the adverse effect of stock dilution and the share price should fall further. As a result, I’d avoid Rolls-Royce for the time being.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stuart Blair 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.

More on Investing Articles

Long-term vs short-term investing concept on a staircase
Investing Articles

Down 37% from May, does Glencore’s near-£3 share price look cheap to me?

Glencore’s share price has tumbled from its one-year traded high, which suggests there may be good value in it. I…

Read more »

Dividend Shares

How much would an investor need in dividend shares to make £1,000 a month?

Jon Smith talks through both the strategy and the numbers behind the investment aim of using dividend shares to make…

Read more »

A row of satellite radars
Investing Articles

Defence spending is on the rise and this UK growth stock could be set to cash in

With the UK ready to increase its defence spending, Stephen Wright thinks the stock likely to benefit the most isn’t…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£11,000 in savings? Here’s how investors could use that to target an annual passive income of £12,892 over time!

Money put into high-dividend-paying shares with the returns used to buy more of them can generate potentially life-changing passive income.

Read more »

Investing Articles

Down 10% and 15% in a month! 2 cheap shares investors might consider buying with £2k today

It's always a good time to buy cheap shares! Harvey Jones picks out two FTSE 100 companies that have fallen…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Here’s how £350 a month could put a stock market beginner on the road to wealth!

Interested in getting a foot on the stock market ladder? Our writer breaks down the facts and figures so aspiring…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

The 5 most popular FTSE 100 shares on the AJ Bell trading platform

Our writer’s been looking at the FTSE 100’s most bought stocks on one particular investment platform. And he’s heartened by…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Why isn’t everyone aiming for £37m in stocks and shares?

It’s never too early to start investing in stocks and shares through a SIPP or ISA. Dr James Fox explains…

Read more »