Everybody loves a bargain, I know I do. A bargain in the form of a blue chip stock is no different in my eyes. This is exactly what I feel Rolls-Royce (LSE:RR) represents right now due to the FTSE 100 market crash.
The COVID-19 pandemic has seen the FTSE 100 lose approximately 25% of its value. Rolls-Royce itself saw near 60% wiped off its share price value.
The announcement of full year results at the end of February saw RR’s share price trading at close to 620p per share. Fast forward to the first Friday in April and a low of 250p per share was RR’s position. This drop off is where I feel the opportunity lies. These shares look mighty cheap to me.
RR is the world’s second-largest maker of aircraft engines. In 2018, RR was named in the top 20 defence contractors in the world.
Full year results
At the end of February, RR announced full year results with some interesting takeaways. The first piece of information that struck me was the 25% increase in underlying core profit, to £810m. A healthy improvement in net cash position to £1.4bn is always good to hear, in case operations cease and you need cash reserves. But how often does that happen, you say?
It pleased me to read there was a reduction in debt level, of £1.1bn. Debt generally makes me uneasy. However, a company managing its debt does make me feel better.
COVID-19
Last week, CEO Warren East announced a trading update relating to the Covid-19 pandemic and its impact. It revealed that RR is joining the Ventilator Challenge UK consortium. There was also mention of salary cuts for executives during this time.
RR announced its decision to draw down fully on a £2.5bn revolving credit facility (RCF). Along with an additional RCF of £1.5bn and existing cash, RR’s liquidity stands at an almighty £6.7bn. The final dividend payment of 7.1p per share has been scrapped, saving a further £137m. Its 2020 forecasted financial guidance has also been scrapped.
Year to date, there has been a 25% reduction in flying hours for its engines as planes are grounded worldwide. This reduction was approximately 50% in March overall.
Next steps
I anticipate orders for new engines will be affected over the coming months and perhaps even a year or two. Rolls-Royce’s saving grace is that it is only one of two major suppliers of jet engines for wide body aircraft. For that reason, I do not imagine that RR will encounter any fatal problems. It also helps that the company possesses lucrative and trusted relationships with Boeing and Airbus.
It is worth noting that the lockdowns and aircraft groundings will not last forever. There has already been easing of restrictions in some European and Asian countries. The world will fly again!
Rolls-Royce is critical to the world’s airline industry, in my opinion. Further short-term pain is expected. But do not be surprised to see these cheap shares soaring high in the months and years to come.
