The euphoria surrounding last year’s Rolls-Royce Holdings (LSE: RR) share price revival has faded as investors take a more realistic view of its prospects. Incredibly, its stock quadrupled between October and December last year, and investors who bought at the right time will have made a fortune. Sadly, I wasn’t one of them.
Despite a second wind in February, the Rolls Royce share price trades at the same level as this time last year, and is down two-thirds measured over three years. More investors will have lost big money on this FTSE 100 stock than made it.
The aircraft engine manufacturer generates most of its revenues from maintenance and service contracts. These are based on miles flown and they collapsed as Covid grounded global fleets. Management has adopted the usual measures facing troubled companies, including rescue packages, non-core asset sales, laying off staff, restructuring, scrapping dividends and so on.
FTSE 100 pandemic victim
Yet it can only do so much to cut costs and prop up the Rolls-Royce share price. Ultimately, it needs customers to start flying their planes again. I fear this year’s summer holiday season may prove another washout, as governments remain reluctant to risk a Covid resurgence by freeing people to travel in large numbers.
Vaccination passports may help, but will people fly with the same alacrity as before? Many will recoil at the thought of sitting in a crowded plane with strangers, followed by hours queuing at passport control after all the social distancing campaigns we’ve been through.
And if Covid continues to ravage parts of Asia and Latin America, many countries look set to remain off-limits for some time to come. There’s some good news as the US and China resume domestic flights, but the international long-haul market will take even longer to put right. This is where Rolls-Royce has most of its market.
The Rolls-Royce share price may fly low for a while
In March, Rolls-Royce reported a worse-than-expected £4bn annual loss but stood by predictions that cash would start flowing again in the second half of this year.
I might be too pessimistic here. We could see a Rolls-Royce share price revival. Vaccines are working. Flight activity has to pick up from here, albeit slowly. Defence sales are up. The group’s Power Systems and ITP units look promising. Investors may decide it has been oversold.
I find the stock hard to judge, though, as I cannot assess the Rolls-Royce share price using traditional measures such as the P/E ratio, operating margins, and return on capital employed. And there’s no dividend while I wait for management to turn this crate around. Rolls-Royce is barred from returning cash to shareholders before the end of next year, at the earliest.
One figure does jump out. Rolls-Royce has £7.3bn of loan obligations. So I don’t think its share price is cheap enough to count as a bargain. In fact, it looks like a risky way to play the post-Covid recovery. It’s not for me.
