The aeronautical engineer Rolls-Royce (LSE: RR) is popular among small shareholders. Over 100,000 individual investors owned 500 or fewer shares at the time of its most recent annual report. The Rolls-Royce share price has fallen to penny share territory lately. Like other shareholders I am wondering what the best move is for my portfolio.
Could this be a buying opportunity for me?
Falling Rolls-Royce share price
After gaining some ground last year, since November the shares have tumbled 40%. They are now 18% lower than they were a year ago. Over the long term, things look even worse. The shares are worth less than a third today of their price five years ago.
The company has faced big challenges. The pandemic and government restrictions saw demand for civil aviation fall sharply. That matters for Rolls-Royce because historically civil aviation has been one of its core business drivers. When airlines fly their planes less, the need for engine servicing falls. That hurt both revenues and profits at Rolls-Royce.
I see a risk that the same thing could happen again. At some point in the future, there could be something that causes civil aviation demand to plummet. Maybe it will be pandemic restrictions but we have previously seen similar demand falls in response to terrorism and even volcanic eruptions. A sustained slowdown in civil aviation could hurt both revenues and profits at Rolls-Royce.
Business recovery
But why has the Rolls-Royce share price been falling lately when the business now seems to be in recovery mode?
After all, travel restrictions are easing and many airlines report robust passenger demand. The company has returned to profit and is generating free cash flow. Its cost-cutting measures during the pandemic could also help its profitability. The defence division never saw the pandemic-related slowdown that hurt the civil aviation business. It continues to trade strongly. All of this adds up to positive news for the investment case, in my view, but the recent share price trend does not reflect that.
I think the reason is that investors are nervous about how strong the recovery at Rolls-Royce is, as well as worrying what a change in leadership this year could bring. I think these concerns are overdone. The strong brand and attractive economics of the business should help it perform well regardless of who its chief executive is. As for the strength of the company’s recovery, I see little appetite in most countries for a return to the sorts of travel restrictions seen a couple of years ago. I reckon that is good news for Rolls-Royce.
My next move
I have bought some Rolls-Royce shares this year. As the company continues to trade as a penny stock, I am considering buying some more.
In the short term, negative sentiment towards the shares could keep them low. But I see the flow of business news from Rolls-Royce as positive. Hopefully that improvement in the company fundamentals will lead to the shares moving up with time. I see the current price weakness as a buying opportunity for my portfolio.
