As someone who recently turned bullish on the outlook for the Rolls-Royce (LSE: RR) share price, it might seem strange for me to be considering if the stock could fall to 0p.
However, it is essential to consider both the bull and bear arguments for any investment before making a buy or sell decision.
Rolls-Royce share price plunge
Unfortunately, no company is immune from bankruptcy or insolvency. Even state-backed businesses such as Rolls-Royce could succumb to market pressures.
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Indeed, this time last year, there was speculation that if the group struggled in its efforts to raise money from the market, management might have to consider an aggressive restructuring. Ultimately, this could have resulted in a total loss for investors.
That was more than a year ago. Today, the corporation is in a much stronger position. By selling off non-core business divisions, the group has raised additional cash. It has also been able to raise money from investors and bondholders.
Efforts to cut costs are also yielding results, and the aviation market is rebounding. On top of these factors, the UK government is now backing the company’s mini nuclear reactor initiative, which could be a hidden gem in the Rolls-Royce business portfolio.
Despite the improving operating environment, the company still faces some significant hurdles. The aviation industry is not expected to recover to 2019 levels of activity until the mid-2020s. That is the most optimistic projection. As the pandemic continues to rumble on, the chances of a full recovery in the near term are looking more and more distant.
At the same time, the group will face challenges from rising costs. Increasing wage and materials inflation will hamper growth efforts. If Rolls cannot pass these additional charges on to customers, it may have to swallow the additional costs itself. For a company that is already struggling to break even, this could be a challenge.
Then there are factors such as competition to consider. Rolls is regarded the world over for its experience in the aviation sector, but customers might not want to place orders with a business struggling financially. This could help competitors steal a march.
Reduced risks
Nevertheless, even after taking these headwinds into account, I think Rolls’ chances of collapse have reduced significantly. Last year, some analysts put the stakes as high as 50/50.
Today, I would say the risk of the Rolls-Royce share price falling to zero is around 20%. The group is back on a stable footing. Still, I think the company will continue to struggle until the pandemic is securely fixed in the rearview mirror. And if the pandemic gets worse and the world goes back into shutdown mode, Rolls may struggle to keep the lights on.
Despite these risks, I still think I would buy the stock as a speculative recovery play for my portfolio, although it may not be suitable for all investors.
