Shares in FTSE 100 stalwart Roll-Royce (LSE: RR) have plunged by 60% over the past four weeks. This dramatic slump has taken shares in the engineering group down to a level not seen for 10 years.
For investors with a long-term time horizon, now could be a great time to buy the stock.
FTSE 100 stock slump
Investors have been selling shares in Rolls over the past few weeks, due to the company’s exposure to the airline sector. The FTSE 100 engineer is one of the two primary suppliers of jet engines in the world. As such, Rolls’ growth is tied to the global airline industry.
However, now that virtually all of the global airline fleet has been grounded, Rolls is going to struggle.
According to the FTSE 100 company’s latest trading update, engine flying hours were down by about 40% in March. They’re expected to fall further in April. The group is paid by airlines based on how many hours its engines fly.
As a result of this, the company has suspended its dividend, has raised £1bn of new credit facilities, and could furlough up to 50% of its shop-floor workers.
Unfortunately, as it’s impossible to stay how long the coronavirus outbreak will last at this stage, it’s impossible to predict when Rolls will recover.
However, its current weakness is also its biggest strength. As noted above, the company is one of the two primary jet engine producers in the world. That’s not going to change anytime soon.
So, when the global economy re-starts, this FTSE 100 blue-chip champion should roar back into action. It could take some time for the business to recover, but the global aviation industry is only set to grow over the next five to 10 years. Rolls should be able to profit from that in the long run.
Time to buy
As such, now could be a good time for long-term investors to grab a share of this British engineering giant. The business could recover quickly when the economy beings to take off again. A resumption of aircraft manufacturing would shock the business back to life. And when planes return to the sky, Rolls will start to see payments from airlines again.
In the meantime, Rolls’ defence and power systems businesses are still ticking over. Last year, the FTSE 100 group’s defence business delivered roughly 50% of the firm’s £808m underlying operating profit.
On top of this, the organisation’s power systems business delivered an operating profit of £375m in 2019. This business is already seeing a pickup in demand from China.
These two businesses should help the company keep the lights on while waiting for the aviation business to recover. When it does, long-term investors could be well rewarded.
If the stock returns to 2019 levels, investors could see an upside of nearly 100%.
