Rolls-Royce shares are nudging higher. Should I buy now?

With Rolls Royce shares edging above 120p this week, is the worst behind it? Dylan Hood investigates the long-term potential of this stock.

| 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.

We’re all aware of the pandemic roller coaster that Rolls-Royce (LSE: RR) shares have been on through the last year. At just above 125p a year ago, they then peaked at just below 140p in June before dipping below 40p in October. The share price has certainly kept investors on their toes. However, is the worst behind it?

Pandemic losses

2020 left Rolls-Royce with a loss of almost £4bn. Rolls makes the majority of its money servicing aeroplane engines, an industry largely curtailed by Covid travel restrictions. In an effort to reduce its cost base, the firm slashed 7,000 jobs, in line with what boss Warren East described as “the largest restructuring in our recent history”.

In October 2020, 6.4bn new shares were issued in an emergency move to raise new capital. Shareholders were able to purchase 10 new shares at 32p each for every three shares they owned. Though this raised £2bn, Rolls-Royce shares halved in value as a consequence, slumping to a 15-year low. This also drastically reduced the earnings per share, a key valuation metric for stock performance.

Pre-pandemic problems

Rolls-Royce shares were troubled even before the pandemic. In 2019, the company had to fork out £800m to remedy ongoing durability problems relating to the Trent 100 engines. This raised the total cost of Trent engine problems to £2.4bn for 2017-2023. Rolls therefore upped spending to get grounded aircraft back in the sky. This put excess strain on cash flow, which was magnified tenfold when the pandemic struck.

Rolls-Royce shares’ future outlook

But while 2020 proved disastrous for Rolls-Royce shares, it’s not all bad news. The company is planning to construct 16 mini-nuclear power plants as part of its small modular reactor programme. It’s expected to receive £200m towards the project from the UK government. Projects like these are essential to the UK if it wants to reach its target of zero emissions by 2050.

And with Covid restrictions easing daily around the world, the travel sector is poised for huge growth in coming years. This is good news for Rolls, as it expects hours flown by its engines to increase 80% by 2022. For example, TUI still has 2.8m holidays booked for this summer, which will be delivered by Boeing 787 Dreamliners. These planes are powered by Rolls-Royce Trent 1000 engines.

Civil aerospace accounts for a dominant slice of Rolls-Royce business. However, Rolls-Royce Defence actually saw growth of 8% throughout 2020, generating an underlying profit of £448m. Also, its Spanish subsidiary ITP Aero, which manufactures niche aero engine and gas turbine parts, made £68m profits. These ventures may help bolster Rolls-Royce shares’ future value.

My Verdict

The aerospace sector was decimated by the pandemic. Though cost-cutting and restructuring did take place, the truth is the company’s balance sheet is still shaky at best.

The pandemic still isn’t over and a sluggish restart of global travel could continue to dent the business, whose share price was declining even before 2020. While the current share price rise may look enticing, there’s still a lot that could go wrong. Therefore, I won’t be adding Rolls-Royce shares to my post-pandemic portfolio.

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.

Dylan Hood owns no 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

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

If I’d invested £20,000 in the FTSE 250 at the start of 2024, here’s what I’d have now

The FTSE 250 has been in growth mode this year. Our writer weighs some pros and cons of investing in…

Read more »

Investing Articles

Is the Rolls-Royce share price about to go nuclear?

This writer wonders whether excitement about Rolls-Royce's small modular reactor (SMR) business could push the share price even higher.

Read more »

Investing Articles

Down 13% today on results, is this FTSE 250 share too cheap to miss?

After slumping to multi-year lows, is FTSE 250 share Pets at Home now an excellent value stock to consider? Royston…

Read more »

Investing Articles

After FY results, why is the easyjet share price still less than half what it used to be?

After a strong set of results, our writer digs into why the easyJet share price is still far lower than…

Read more »

Investing Articles

Can the Aviva share price get above £5 and stay there?

With the Aviva share price edging towards the £5 level, our writer weighs some pros and cons that might influence…

Read more »

Investing Articles

Here’s the BT share price forecast up to 2027

After a long slide, the BT share price has finally started to pick up a bit in 2024. And analysts…

Read more »

Investing Articles

If I’d invested £10,000 in a FTSE 100 index fund 5 years ago, here’s how much I’d have now

The FTSE 100’s recent performance isn't quite what it was back in the 90s. But it still hosts several fantastic…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing For Beginners

Why I believe this cheap stock is fundamentally doomed

Jon Smith points out a cheap stock that he's personally not going to get involved with due to a risk…

Read more »