The Motley Fool

Is the Rolls-Royce share price a bargain after crashing 13%?

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.

Close-up Of Wooden Blocks With Risk Word In Front Of Businessperson's Hand Holding Magnifying Glass
Image source: Getty Images

FTSE 100 engine manufacturer Rolls-Royce Holdings (LSE:RR) is having a tough year. The coronavirus pandemic brought airlines screaming to a halt, putting parts and repairs on hold. This immediately affected Rolls-Royce, creating unparalleled challenges for the company. The Rolls-Royce share price is down 13% in the past month and 65% year-to-date. Unfortunately, a further slide seems likely.

Power-by-the-Hour

The Rolls-Royce income model is unusual. Power-by-the-Hour, a Rolls-Royce trademark, was conceived in 1962. It means the company sells its engines at a loss, making its money from aftercare service. This guarantees the buyer a quality service and engines that perform well, while the firm enjoys a steady income based on hours flown. It is a model that worked well for over 50 years, but the pandemic has seen it come crashing to a halt. The business is now haemorrhaging money as the costs to continue far outweigh the money flowing in. Illustrating why the Rolls-Royce share price is suffering so badly. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

£1.5bn rights issue

Financial analysts examining the company have warned that it could need to raise a minimum of £6bn to get through the crisis. Ratings agency Moody’s downgraded the Rolls-Royce credit rating to Junk at the end of July, which makes it much more difficult to borrow sizeable sums of money. As a business that requires large amounts of cash to operate, it is resorting to a rights issue to shore up its funds.

A rights issue is basically a share placing, diluting the existing shares, by introducing a batch of new ones. These are offered to existing shareholders, giving them the opportunity to own more of the company at a lower price. In its upcoming rights issue, scheduled for September, it hopes to raise £1.5bn to improve its balance sheet and help recovery from the pandemic-induced aviation crash.

It is also considering putting its Spanish turbines manufacturer, ITP Aero, up for sale. From this, it would hope to raise around £1bn. Prior to this it already cut 9,000 jobs and cancelled its dividend, both of which further hammered the RR share price.

Rolls-Royce share price woes

Although the airline business is struggling, Rolls-Royce is a world-leader in other areas of manufacture. I like that it is heavily involved in Artificial Intelligence, which is a business for the modern age. If it can get its financial worries under control, then I think it still has a lot going for it.

Geopolitical tensions, on heightened alert for years, now appear to be escalating. This benefits the Rolls-Royce defence division, which continues to receive government orders. There is clearly a lot of concern surrounding how it can get back on track, but I will be very surprised if this company goes under.

This may make the shares a tempting bargain at current prices. However, with the rights issue ahead, I imagine they have further to fall. I would wait until later in the year before considering buying any shares.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Kirsteen 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.