The Rolls-Royce share price is trading at dirt-cheap levels. Here’s what I’d do now

The Rolls-Royce share price has endured a rotten decade and the coronavirus will only make its much-needed turnaround harder.

| 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.

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.

I’d love to recommend you buy into the Rolls-Royce (LSE: RR) share price, as the aircraft engine maker should be our premium engineering company. It’s been hard to love in recent years, though. Investors have had a horribly bumpy ride.

The Rolls-Royce share price is now lower than it was a decade ago. It has plunged 70% over the last two years. The rot set in well before Covid-19, but the pandemic hasn’t helped.

Shares in Rolls-Royce have crashed another 8.62% today, after its first-half 2020 trading update revealed a 50% drop in widebody engine flying hours in the first half of the year. That widened to 75% the second quarter. That’s a major blow for its Civil Aerospace division, as its business model relies on the number of hours its engines spend in the air.

Is the Rolls-Royce share price a bargain?

The FTSE 100 group endured a “free cash outflow” of around £3bn, which is a euphemistic way of saying burned through £3bn of cash, which is set to hit £4bn for the full year. Reduced engine deliveries and servicing were to blame, along with a £1.1bn one-off cost from scrapping invoice factoring.

Cash flow was a problem before the pandemic. It is a much bigger one now. Once again, the crisis has thrown a harsh light on a company’s existing problems.

Management has made mistakes but today’s Rolls-Royce share price slump was out of its hands. There’s not much it can do given the collapse of global travel, and the recovery will be slow. By 2021, engine flying hours are set to be just 70% of pre-pandemic levels.

CEO Warren East blamed exceptional times, and said civil aviation will take several years to recover from its “historic shock”, which upended the “positive momentum and strong liquidity” the group enjoyed at the start of the year.

East is responding by restructuring its Civil Aerospace division, with thousands of job loses. Rolls-Royce has a strong liquidity position, now increased to £8.1bn, which includes a new and undrawn £2bn five-year term-loan facility. That is encouraging but it may be needed, and investors cannot rule out a further equity raising or disposals to boost its balance sheet.

This FTSE 100 stock pays no dividend

East has been unlucky. His turnaround strategy chose to focus on aviation, which was outperforming when he took over in 2015. The Rolls-Royce share price just can’t catch a break.

There were some positives today. The group is making “good progress” on fixing its Trent 1000 series engines. Defence remained “resilient”.

Would I buy Rolls-Royce shares? The group suspended its dividend and scrapped profit targets in April, so there is no income while you wait for the recovery. Given the way it is bleeding cash, that could take time. Rolls-Royce stock is down more than 60% since its February peak, and largely missed the recovery in April and May.

I would consider buying it on a minimum 10-year timescale. Over such a lengthy period, management should get a grip, with positive effects for the Rolls-Royce share price and dividend. It will be a long and painful journey though.

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.

Harvey Jones has no position in any of the 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

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »

Investing Articles

I think the Rolls-Royce dividend is coming back – but when?

The Rolls-Royce dividend disappeared in 2020 and has not come back. But with the company performance improving, might it reappear?

Read more »

British Pennies on a Pound Note
Investing Articles

Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Stock market bubble – or start of a bull run?

Christopher Ruane considers whether the surging NVIDIA share price could be symptomatic of a wider stock market bubble forming.

Read more »

Investing Articles

Buying 8,254 Aviva shares in an empty ISA would give me a £1,370 income in year one

Harvey Jones is tempted to add Aviva shares to his Stocks and Shares ISA this year. Today’s 7.37% yield isn't…

Read more »

Investing Articles

Is the tide turning for bank shares?

Bank shares are trading on stubbornly cheap-looking valuations yet business performance in the sector is broadly robust. Should our writer…

Read more »