Rolls-Royce (LSE:RR) shares were one of the biggest losers on the FTSE since the pandemic struck over two years ago, in my opinion. I’ve been keeping a close eye on developments, as well as wondering when the right time could be for me to add them to my portfolio. Now is that time. Here’s why I’ve decided to take the plunge and buy some shares.
Rolls-Royce shares woes
Rolls-Royce’s fall from grace since 2020 has been well-documented. With fleets grounded and the aviation industry in ruins due to the pandemic, it was never going to be an easy ride.
The Rolls-Royce share price has experienced a dramatic fall. As I write, the shares are trading for 73p. Before the pandemic caused a market crash in February 2020, the stock was trading for 232p. This is a 68% decline. They dipped as low as 38p in September 2020, which is a 83% drop from pre-crash levels. Over the past 12-months, the shares have fallen 42% from 126p to current levels.
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Why I’m buying shares
So what has made me decide to buy Rolls-Royce shares now? Well, to start with, its last two trading updates have shown me signs of life. In March, it released full-year results for the year ended 31 December 2021, reporting an operating profit for the first time in two years. This was due to the aviation industry reopening post-pandemic. More recently, it released a half-year report for the period ended 30 June 2022. This report showed that revenue, profit, margin, and free cash flow all increased compared to 2021.
With Rolls-Royce capitalising on recent upward trends, I believe it could continue to capitalise on two main fronts. Due to the unfortunate events in Ukraine, defence spending is set to increase. This could boost its balance sheet and performance overall. Air travel and the aviation industry as a whole have experienced unprecedented demand recently. It seems as though restrictions gave consumers a new zest for travelling.
Finally, looking at Rolls-Royce’s fundamentals, I notice that its forward looking P/E-to-growth ratio (PEG) is below 1. Many believe that a ratio under 1 shows that the stock could be undervalued based on its potential growth prospects.
Risks to note
Despite my decision to buy Rolls-Royce shares, I am aware of potential challenges ahead. During its turbulent period, the company had to borrow to keep the lights on, which means it does have debt on its balance sheet. This could affect growth and returns, especially in the shorter term.
Current macroeconomic headwinds could also prevent Rolls-Royce from growing as quickly as it would like. Soaring inflation and rising costs could impact profitability. Furthermore, a cost-of-living crisis has emerged. These rising costs and potentially weaker demand, based on tighter budgets for consumers, could restrict performance and returns.
In conclusion, I am aware that Rolls-Royce isn’t out of the mire just yet. I fully expect some further issues ahead. However, my investment strategy has always been to invest for the long term. In this time period, I believe it could return to former glories which could make it a shrewd addition to my portfolio right now. I’m going to buy a small number of shares, and keep a close eye on developments.
